Trinity Mirror plc is pleased to announce the proposed acquisition of Northern & Shell’s publishing assets for a total purchase price of £126.7 million. These comprise Northern & Shell Network Limited (“NSNL”), a subsidiary of Northern & Shell Media Group Limited containing the publishing assets of Northern & Shell and its subsidiaries, International Distribution 2018 Limited and a 50% equity interest in Independent Star Limited.
The purchase consideration of £126.7 million will be satisfied by the payment to the Northern & Shell Media Group Limited of, in aggregate, an initial cash consideration of £47.7 million; deferred cash consideration of £59.0 million payable over 2020 – 2023; and the balance of £20.0 million by the issue to the seller of 25,826,746 new ordinary shares of 10p each (“Consideration Shares”). Trinity Mirror will also make a one-off cash payment of £41.2 million to the Northern & Shell Pension Schemes and a recovery plan through to 2027 has been agreed with total payments of £29.2 million.
Strong strategic rationale
The Trinity Mirror Board believes the Acquisition creates a media business of scale to better serve our readers and advertisers, enabling the Enlarged Group to:
o Improve its print and digital editorial propositions by reducing duplication, sharing content and widening the breadth of editorial coverage with larger combined teams;
o Provide advertisers and agencies with a large, high quality audience, including a combined digital audience of 234 million monthly unique browsers (excluding apps); and
o Improve its digital products through shared investment and best practice. Strong financial rationale
The Board believes the Acquisition is financially compelling and will deliver attractive returns to shareholders as the Enlarged Group will:
o Have a more robust revenue mix with circulation revenue representing nearly half of the Enlarged Group’s revenue and placing less reliance on print advertising;
o Deliver £20 million in annualised cost synergies by 2020, with a significant amount of these savings achieved in 2019;
o Generate strong cash flows providing financial flexibility for investment, continued support for the Enlarged Group’s historic pension scheme liabilities and potential return of capital to shareholders; and
o Be materially earnings enhancing in the first full year of ownership
Commenting on the acquisition, Simon Fox, chief executive, Trinity Mirror plc, said: “This deal is a really exciting moment in Trinity Mirror’s history, combining some of the most iconic titles in the UK media industry. It is good for our readers, good for our customers and good for our shareholders. Northern and Shell’s titles have a large and loyal readership, a growing digital presence and a stable revenue mix and offer an excellent fit with Trinity Mirror.”
Richard Desmond, chairman of Northern & Shell, said: “The Express Newspapers and our celebrity magazine titles have been a key part of the Northern & Shell portfolio for many years, and I am immensely proud of building them into one of the largest newspaper and magazine groups in the UK.
“Today’s transformational transaction is a logical and natural next step in the evolution and consolidation of the media sector and will create a larger and stronger platform serving all stakeholders.
“In Trinity Mirror we have a great partner, who will be an excellent steward of the business going forward and I am delighted to be able to retain an ongoing interest in the combined group.”
About Northern & Shell’s publishing assets
Northern & Shell’s publishing assets are a significant force in the UK media sector, with a portfolio of newspapers and magazines which comprise four national newspaper titles (the Daily Express, Sunday Express, Daily Star and Daily Star Sunday) and three celebrity magazines (OK!, New!, and Star) together with a 50% joint venture interest in the Irish Daily Star, outside the UK.
Northern & Shell operates a print plant in Luton, Westferry Printers, serving its portfolio of newspapers and magazines as well as providing third-party printing services
The Express.co.uk and Dailystar.co.uk websites achieved 280 million page views in December 2017 compared to 649 million for the Trinity Mirror websites (excluding apps and galleries).
Northern & Shell’s publishing assets performed well in 2017 despite continued pressure on its print advertising revenues. Total revenues (after separation adjustments) are estimated to have marginally increased in 2017, with growth in newspaper circulation revenues (arising from the partial reversal of cover price discounting) and digital revenues offsetting declines in print advertising revenues. Adjusted EBITDA (after separation adjustments) is estimated to be circa. £34 million, benefiting from operational and strategic reductions in printing and production, marketing and other operating costs.
Consideration and financing
The consideration for the acquisition of Northern & Shell’s publishing assets will be a total of £126.7 million payable through:
A cash payment of £42.7 million on completion of NSNL (“NSNL Completion”);
£20.0 million satisfied by the issue of 25,826,746 Consideration Shares at a price of 77.4p per share;
Deferred consideration of £18.9 million, £16.0 million, £17.1 million and £7.0 million payable on the
second, third, fourth and fifth anniversaries, respectively, of NSNL Completion;
The consideration payable for the acquisition of the 50% equity interest in the issued ordinary share capital of Independent Star Limited will be cash of £4.5 million payable on completion of such acquisition; and
The consideration payable for the acquisition of the issued ordinary share capital of International Distribution 2018 Limited will be cash of £0.5 million payable on completion of such acquisition.
In addition, an upfront payment of £41.2 million will also be made on NSNL Completion to the Northern & Shell Pension Schemes and a recovery plan through to 2027 has been agreed with total payments of £29.2 million.
Trinity Mirror will fund the cash element of the purchase price, the contributions to the Northern & Shell Pension Schemes and transaction costs by the utilisation of a new £75 million amortising term loan facility, which will be fully drawn, with the balance being drawn down from its existing debt facility and cash balances.
Following the Acquisition, the Enlarged Group will have a robust balance sheet and leverage not increasing beyond one times EBITDA.
Circular to Shareholders and Notice of General Meeting
Further details of the Acquisition, together with a notice convening a General Meeting on 27 February 2018 to approve the Acquisition, will be contained in a circular that will be sent to shareholders today (the “Circular”). The Circular will include a recommendation from the Board of Trinity Mirror that shareholders vote in favour of the Acquisition. If approved by the shareholders, NSNL Completion is expected to take place on 28 February 2018
Trinity Mirror’s strategy
Trinity Mirror is one of UK’s largest commercial news publishers with national and regional news brands across the UK, including influential and iconic brands such as the Daily Mirror, Sunday Mirror, Sunday People, Daily Record, Sunday Mail and market leading regional titles in key metropolitan markets across the country.
Trinity Mirror’s brands have a long heritage of being trusted sources of news and information, with our editorial conviction and high standards of journalism providing audiences with timely information and opinion across multiple platforms.
Trinity Mirror’s vision is “to be an essential part of people’s daily lives by delivering quality content and services that inform, enlighten and enrich”.
To deliver this vision it is clear that quality content is and will remain at the heart of Trinity Mirror’s business. At the same time, Trinity Mirror’s businesses operate in the rapidly evolving media sector and face a challenging trading environment, which continues to place structural pressure on its print-related revenue while at the same time presenting opportunities to grow its digital revenue.
In this regard, Trinity Mirror’s strategy is to grow, build, protect and consolidate its strong position in the communities it serves through four key areas of strategic focus:
Grow: grow digital audience and revenue through deepening relationships with readers and optimising response for advertisers;
Build: build a diversified product portfolio and sustainable mix of new revenue;
Protect: protect our print brands by efficiently delivering quality products; and
Consolidate: seek out strategic opportunities that drive value.
Trinity Mirror’s financial objective in the short term is to support profits and cash flows through revenue and efficiency initiatives and to deliver sustainable growth in revenue, profit and cash flow over the medium term.
The Board believes that growth from the continued focus on digital audience and revenue from Trinity Mirror’s core news sites coupled with new revenue streams by building new products and services will begin to outstrip print declines on an aggregate basis, leading to a stabilisation of Trinity Mirror’s revenues and then a return to top-line growth. This, combined with Trinity Mirror’s focus on efficiencies, makes the Board confident that the delivery of sustainable growth in revenue, profit and cash flow is achievable in the future, for the benefit of all stakeholders.
Background to, and strategic and financial rationale for,
Northern & Shell’s publishing assets are also a significant force in the UK media sector, with a portfolio of newspapers and magazines which comprise four national newspaper titles (the Daily Express, Sunday Express, Daily Star and Daily Star Sunday) and three celebrity magazines (OK!, New! and Star) together with a 50% joint venture interest in the Irish Daily Star, outside the UK. Northern & Shell’s publishing assets operate a print plant in Luton, serving its portfolio of newspapers as well as providing third-party printing services.
The Board believes Trinity Mirror is well positioned to drive value from acquiring Northern & Shell’s publishing assets and that the Acquisition will create value for all stakeholders. The Acquisition is an attractive opportunity, which is consistent with Trinity Mirror’s strategic objectives and goals and firmly fits into the fourth area of strategic focus – “Consolidate: seek out strategic opportunities that drive value”.
As well as driving value for Shareholders, the increased scale of the Enlarged Group is anticipated to provide increased financial flexibility in the medium term for investment and meeting the Enlarged Group’s pension obligations.
Key rationales for the Acquisition are to create a media business of scale to better serve our readers and advertisers and that is financially compelling and will deliver attractive returns to shareholders.
The following sections explain each reason in greater detail.
The Acquisition will create a media business of scale to better serve our readers and advertisers, enabling the Enlarged Group to:
i) Improve its print and editorial propositions
The news industry continues to face significant structural changes which are threatening the long-term economic viability of smaller print publishers. By bringing the publishing assets of Trinity Mirror and Northern & Shell together, we will be better placed to serve our readers, both in print and in digital.
The Enlarged Group will be able to improve its editorial propositions by reducing duplication, sharing content across the Enlarged Group and widening the breadth of our coverage with larger combined teams.
ii) Provide advertisers and agencies with a large, high quality audience
The Acquisition will add another four national newspapers (two dailies and two Sundays) and three paid-for weekly magazines to our five national newspapers.
The Enlarged Group’s digital portfolio will comprise a network of publishing websites delivering 234 million monthly unique browsers (excluding apps) and 963 million monthly page views (excluding apps and galleries) 2 as at December 2017 with over 50 per cent. of its online audience based in the UK. The Acquisition will therefore lend considerable strength to Trinity Mirror’s digital portfolio, enabling Trinity Mirror to provide a more compelling offering for digital advertisers and therefore to compete more effectively with the global scale of the digital platforms.
The Express.co.uk and Dailystar.co.uk websites achieved 280 million page views in December 2017 compared to 649 million for the Trinity Mirror websites (excluding apps and galleries).
iii) Improve its digital products through shared investment and best practice
The Acquisition will enable the sharing of best practices, content and resources across both businesses. We will retain the distinct editorial propositions of each of the four national newspaper sites to ensure that each has its own editorial and audience focus thereby enabling us to minimise editorial duplication and maximise digital revenue.
As Trinity Mirror has demonstrated with the Local World acquisition, by sharing digital and other technology there is an opportunity to deliver improved digital products for all brands and benefit from efficiencies when doing so through shared investment.
The Acquisition is financially compelling and will deliver attractive returns to shareholders as the Enlarged Group will:
(i) Have a more robust revenue mix
The Enlarged Group will have a more robust revenue mix, placing less reliance on the most structurally challenged revenue stream, print advertising, and having a greater proportion of circulation revenue where volume declines are partially mitigated by cover price increases. Enders Analysis has forecast national print advertising revenue to decline by 13 per cent. in 2018, whilst circulation revenues have proven to be more resilient historically even though volumes remain under pressure.
Following the Acquisition, circulation revenue will represent nearly half of the Enlarged Group’s revenue. In 2016, circulation revenue for Trinity Mirror and Northern & Shell’s publishing assets represented 43.6 per cent. and 61.2 per cent. respectively of total revenue of each group.
In addition to the higher proportion of revenue arising from circulation, Northern & Shell’s publishing assets have a significantly lower proportion of total advertising revenue accruing from print and digital classified advertising (5.4 per cent. in 2016 compared to 19.5 per cent. of total revenue for Trinity Mirror in 2016).
(ii) Deliver cost synergies
Trinity Mirror has a proven track record of successful, efficient and value accretive acquisitions. Most recently this has been demonstrated by the Local World acquisition in November 2015 where Trinity Mirror delivered synergies of £15 million, £3 million ahead of the £12 million target set out in the circular to shareholders on 28 October 2015, and has been able to significantly de-leverage within two years of the acquisition. These synergies have been delivered by sharing best practice between Trinity Mirror and Local World and building on our experience of tightly managing the cost base over a number of years.
The Enlarged Group will benefit from Trinity Mirror’s track record of delivering synergies and successful cost management, creating scope for cost synergies. Cost synergies are expected to arise through deploying know- how learnt during the delivery of historic structural costs savings in Trinity Mirror’s own businesses, through the integration and future operation of certain activities on a group-wide basis across the Enlarged Group, and through the implementation of Trinity Mirror’s tight management of the cost base.
Trinity Mirror management has experience of operating a large stable of different news brands under a single combined management structure. There will be no reduction in media plurality following the Acquisition as each newspaper brand will continue with its current editorial positioning, ensuring that it continues to present the editorial content to which its readers and advertisers are accustomed. Trinity Mirror currently operates over 100 news brands and Trinity Mirror’s policy is that each is free to take its own editorial position on politics and current affairs, bearing in mind the opinions of their readers. Trinity Mirror does not interfere in the editorial positions of its titles, which remain firmly the responsibility of the individual titles’ editors and their senior editorial teams.
It is anticipated that cost savings will be achieved following the Acquisition, and that a full run rate of £20 million before tax per annum will be achieved by 2020, with a significant amount of these savings achieved in 2019. The synergy savings are expected to accrue in the areas of content generation (£9.3 million), cost of advertising sales (£4.3 million), digital and technology costs (£2.1 million), printing and distribution (£3.3 million) and management and central costs (£1.0 million).
It is anticipated that total restructuring costs of £16 million and capital expenditure of £4 million will be incurred across the first and second years of ownership in order to deliver these cost savings.
The synergies identified above reflect both the beneficial elements and the relevant costs that will arise as a result of the Acquisition. The synergies are contingent on the Acquisition and could not be achieved by Trinity Mirror and Northern & Shell’s publishing assets operating independently.
The synergies represent circa 3 per cent. of the Northern & Shell’s publishing assets and Trinity Mirror estimated combined adjusted 2017 cost base (after separation adjustments).
(iii) Generate strong cash flows and be materially earnings enhancing
The purchase consideration of £126.7 million, plus the contributions agreed to be paid to the Northern & Shell Pension Schemes, implies an enterprise value of £184.2 million and an EBITDA multiple pre anticipated synergies of 5.4 times on the estimated 2017 adjusted performance (after separation adjustments). Post anticipated synergies, this implies a multiple of 3.4 times on the estimated 2017 adjusted performance (after separation adjustments). It is anticipated that the Acquisition will be materially earnings enhancing in the first full year following the acquisition of Northern & Shell Network Limited and will strengthen the strong cash generative nature of the Enlarged Group for investment, continued support for the Enlarged Group’s historic defined benefit pension scheme liabilities and potential return of capital to shareholders. For the purposes of earnings enhancement, the Company regards the relevant metric as Adjusted EPS.
Information on Northern & Shell’s publishing assets Portfolio
The Northern & Shell publishing portfolio comprises the following titles:
Daily Express and Sunday Express;
Daily Star and Daily Star Sunday;
Express.co.uk and Dailystar.co.uk websites;
paid for celebrity magazines OK!, New! and Star;
ok.co.uk, new-magazine.co.uk and star-magazine.co.uk websites; and
the Irish Daily Star (through a 50% equity interest in Independent Star Limited).
The performance of Northern & Shell’s publishing assets over 2014 to 2016 has been affected by cover price discounting for its newspapers which has adversely impacted its circulation revenue and profitability. The cover prices of the Daily Star Monday to Friday, Daily Star Saturday and Daily Star Sunday were halved to 20 pence, 30 pence and 50 pence respectively during October 2015. The cover prices of the Daily Express Monday to Friday (in Scotland only) and Daily Express on Saturday were reduced to 30 pence and 45 pence respectively in December 2015 and January 2016. There were marginal increases in cover prices during July and August 2016 but not to the levels prior to the 2015 cover price discounting. The reduction in cover prices has increased circulation volumes through an increase in the frequency of purchase. There were no cover price changes in 2017 and no further cover price changes have been implemented up to the date of this announcement.
Revenue declined by 11.8 per cent. in 2015 and by 12.0 per cent. in 2016 reflecting both a fall in circulation revenue as a result of cover price discounting and a fall in print advertising revenue. Circulation revenue has increased in 2017 as a result of the partial reversal of cover price discounts during 2016. Strong growth in digital revenue has been supported by strong audience growth.
To facilitate the separation of Northern & Shell’s publishing assets from the wider Seller group, Trinity Mirror and the Seller will enter into commercial agreements at NSNL Completion in relation to advertising and production services. The Seller has committed to purchase advertising services from Northern & Shell and/or Trinity Mirror for a period of five years to December 2022 to the value of approximately £32 million. Trinity Mirror has committed to purchase TV advertising and production services through the Seller during 2018 to the value of approximately £4 million.
To further facilitate the separation of Northern & Shell’s publishing assets from the wider Seller group, Northern & Shell and the Seller will enter agreements at or prior to NSNL Completion including:
a new 10 year lease with a five year break for the premises currently occupied by Northern & Shell at 10 Lower Thames Street, London, a property owned and managed by Badger Property Partners LLP (of which Mr R.C. Desmond is a member); and
the transfer of staff and resources currently employed by Northern & Shell who work on non-publishing and/or corporate head-office activities for the Seller group, which are being retained by the Seller.
The impact of these separation arrangements on actual and estimated revenue figures for Northern & Shell’s publishing assets for the financial years ended 31 December 2016 and 31 December 2017 is £0.4 million and £1.8 million respectively. The impact of these separation arrangements on the adjusted EBITDA actual and estimated figures for Northern & Shell’s publishing assets for the financial years ended 31 December 2016 and 31 December 2017 is £18.2 million and £16.7 million respectively.
The results for 2016 were revenue and adjusted EBITDA (after separation adjustments) of £190.3 million and £31.2 million, respectively. The Directors estimate that for 2017 Northern & Shell’s publishing assets generated revenue marginally ahead of 2016 and adjusted EBITDA of circa. £34 million (after separation adjustments). These estimates demonstrate a significant improvement in performance since the partial reversal in 2016 of the cover price reductions.
The revenue and adjusted EBITDA (after separation adjustments) estimated for the financial year ended 31 December 2017 are based on the unaudited management accounts of Northern & Shell’s publishing assets for that period. The estimates for 2017 have been compiled on the basis used to prepare the audited statutory accounts and adjusted results for 2016. The basis of accounting used is consistent with the accounting policies of Trinity Mirror. The Directors have assumed for this purpose that the audit of Northern & Shell financial information for the financial year ended 31 December 2017 will not require any material adjustments or reveal any unforeseen matters that would have a material impact on the estimated revenue and adjusted EBITDA. This assumption is, however, outside the control of the Directors.
As part of the Acquisition, Trinity Mirror will also assume the historical liabilities relating to the Northern & Shell Pension Schemes. These schemes had a total deficit of £31.3 million on an IAS19 basis at 31 December 2016 and had a valuation deficit of £63.6 million at their last actuarial valuations.
New deficit contribution recovery plans have been agreed with the trustees of the Northern & Shell Pension Schemes as part of the Acquisition and, in aggregate, these require an upfront contribution of £41.2 million and annual contributions of £1.9 million each year from 2018 to 2020, £4.1 million per annum from 2021 to 2023, £3.3 million per annum from 2024 to 2026 and £1.3 million in 2027. Post tax, these contributions equate to £57.5 million in total.
Summary of the key terms of the Acquisition
Under the terms of the Share Purchase Agreement, Trinity Mirror will (subject to the satisfaction of certain Conditions) acquire Northern & Shell’s publishing assets from the Seller for a total purchase price of £126.7 million.
The purchase consideration of £126.7 million will be satisfied by the payment to the Seller of, in aggregate, £106.7 million in cash and the balance of £20.0 million by the allotment and issue to the Seller of 25,826,746 Consideration Shares.
Northern & Shell comprises three separate businesses: Northern & Shell Network Limited and its subsidiaries, International Distribution 2018 Limited and the 50% equity interest in the issued ordinary share capital of Independent Star Limited. Independent Star Limited is a 50:50 joint venture between Express Newspapers and Independent News and Media Plc which publishes and sells the Irish Daily Star newspaper (Monday to Saturday) n the Republic of Ireland. International Distribution 2018 Limited sells the Daily Express, the Sunday Express, the Daily Star Sunday and celebrity magazines OK!, New! and Star in the Republic of Ireland.
The cash component of the consideration for the acquisition of Northern & Shell Network Limited will be paid as to £42.7 million on NSNL Completion and as to £59.0 million in four tranches of £18.9 million, £16.0 million, £17.1 million and £7.0 million on the second, third, fourth and fifth anniversaries, respectively, of NSNL Completion.
The Consideration Shares will be allotted and issued to the Seller at NSNL Completion based on a reference price of 77.4 pence per share. The Consideration Shares represent 9.4 per cent. of Trinity Mirror’s existing issued ordinary share capital.
Financial effects of the Acquisition
The Board believes that the Acquisition will generate considerable value for shareholders, with increased financial flexibility in the medium term, increased scale and cost synergies.
The key financial implications of the Acquisition are as follows:
following the Acquisition, the Enlarged Group will have a robust balance sheet with pro forma net assets of £635.3 million and leverage not increasing beyond one times;
materially earnings-enhancing in the first full year following the Acquisition;
strong cash generation, which provides financial flexibility for investment, continued support for the Enlarged Group’s historic defined benefit pension scheme liabilities and potential return of capital to shareholders; and
recurring cost synergies, which will further enhance the financial strength of the Trinity Mirror Group.
Financing of the Acquisition
Trinity Mirror will fund the cash element of the purchase price, the contributions to the Northern & Shell Pension Schemes and transaction costs by utilisation of a new £75 million amortising term loan facility, which will be fully drawn, with the balance being drawn down under its existing debt facility and cash balances.