The FT in play

By Felix Salmon
November 6, 2012
up for sale, according to Bloomberg, with an asking price of £1 billion.

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This will come as a surprise to absolutely no one, but the Financial Times is going up for sale, according to Bloomberg, with an asking price of £1 billion. (Pearson has denied the story, in less than convincing terms.)

That’s big number. Here’s the back-of-the-envelope: the FT Group made £22 million in the first half of this year, so £1 billion would be roughly 23 times earnings. But the FT Group includes 50% of the Economist, which is highly profitable, as well as Medley Global Advisors, Mergermarket, and sundry other bits and pieces. I’m not entirely sure why Pearson would want to hold on to those things after selling off the FT, but the report is that it’s the newspaper, rather than the Group, which is for sale. (Maybe Pearson reckons it can fetch more by selling the Group off in parts than it could selling the whole.)

Pearson hasn’t said whether the FT is profitable on a standalone basis, but if it does make money, it doesn’t make much. There is lots of value in the FT brand, but it’s not the kind of value you can compute with a DCF analysis. Whoever buys the FT will not be doing so in the expectation that it will pay for itself through profits: to the contrary, I fully expect any acquirer to spend a substantial amount of money investing in the FT over and above the purchase price.

Up until now, Pearson has had a strategy of trying to maximize cashflow from the FT: it charges enormous sums for subscriptions, and generally behaves as though it wants to extract the maximum amount of money from the newspaper before the franchise dies. The strategy was once explained to me in very simple terms: that it would be downright embarrassing for a newspaper called the “Financial Times” to be a money-losing operation. As a result, the FT does everything it can to maximize profits, even if that means reducing the value it provides to subscribers. (Everything from Lex to China Confidential, for instance, gets its own surcharge, making a lot of FT content off-limits to people spending $350 per year or more.)

It is unlikely that the FT’s new owner, if and when the paper is sold, will take the same approach. After all, the current strategy will never generate $1 billion of value: that’s why Pearson is being sensible by selling rather than holding. Here’s how Michael Lewis explains it:

The right price to pay for a newspaper is a bit like the right price for a sports team or a work of art: whatever some rich person is willing to pay. And as profits dwindle, that rich person is paying less and less for the cash flows, and more and more for the cachet…

There’s a word for an investor who clings to an asset whose chief value, its cachet, is of virtually no value to them: insane.

Pearson loves to repeat that “the FT is a valued and valuable part” of the company, but there’s a good reason why public, listed companies tend not to own things like sports teams or works of art. For that matter, Pearson is one of very, very few public companies which own newspapers and which don’t have a dual-class share structure giving control of the company to some mogul or family. The buyers might not be doing DCF math, but the sellers do it all the time, and the value of $1 billion to Pearson is vastly greater than the present value of the FT’s future cashflows would ever be.

The new owner, of course, will want to get $1 billion of value out of his investment, but he won’t be trying to get there by using the FT’s current playbook of constantly raising subscription rates. That, along with its paywall paranoia — the determination with which it attempts to prevent non-subscribers from reading all but the tiniest amount of FT content — means that it is actively repelling the population which is its best chance at future growth and relevance.

The FT loves to tell advertisers that it reaches lots of very rich and important high-level executives, which is true. Newspapers sell readers to advertisers, and those executives are where the money is right now. But they’re not where the money will be, in say a decade’s time. When Rupert Murdoch bought the WSJ, I expected him to turn it into a formidable global brand, especially in China; instead, he invested millions in a new section devoted to New York City. It turns out that Murdoch’s desire to compete with and beat the NYT is greater than his desire to invest in an ultra-long-term project which would probably only pay off after he was dead.

But there are two huge global news companies which are desperate to make inroads in China and other fast-growing countries: they have an enormous strategic interest in reaching the next generation of global technocrats, and they know they can’t do that with terminals alone. They need something which can travel more easily, something with a first-rate reputation: a foot in the door, if you will. To Bloomberg and Thomson Reuters, the value of the FT is not in its profitability, but rather in its reach and its reputation. It’s one of the very few possible ways of reaching the people who will be running the world in 10 or 20 or 30 years’ time — no matter what country they currently live in.

The FT isn’t there yet: it’s still far too reliant on its UK business-news monopoly. Articles like “Foreign demand in London boosts Telford” only really make sense in a physical newspaper read on commuter trains into the UK capital, but we’ll keep on seeing them, so long as that physical newspaper is attractive to a lot of UK advertisers. For all that media executives love to talk about globalization, the fact is that for the time being there’s precious little genuinely global advertising, and there’s still more money in UK print ads than there is in glossy B2B online-branding campaigns aimed at international business executives.

And there’s another inconvenient fact for would-be acquirers of the FT: journalism doesn’t have economies of scale. The bigger that journalistic organizations become, the less efficient they get: salaries rise, new layers of editors and managers appear, and per-person budgets grow all everywhere, for everything from IT to travel expenses. Journalism is a world of diminishing returns: size matters, but it’s also very expensive. If the FT was absorbed into a much larger organization, its editorial budgets would end up rising even before the new owners started investing money in putting reporters all over the world, building the foundations for future relevance.

The Bloomberg story does mull the prospect that the FT could end up being a vanity purchase for a billionaire “from Russia, the Middle East or Asia”; this is possible, but my guess is that it’s unlikely. For one thing, Michael Bloomberg and David Thomson are just as rich as anybody who might think about putting themselves on the list, and they actually know how to make money out of news. And on top of that, Pearson wouldn’t just sell to the highest bidder: they might be a public corporation, but that doesn’t mean they’re completely insensitive to the optics of these things.

The most intriguing part of the Bloomberg story, for me, is the bit where it says that Thomson Reuters may decide not to make an offer. That would be sad: I would love to have the FT’s amazing roster of journalists in-house here at Reuters, although of course all such decisions are vastly above my pay grade. (It should go without saying, but I’ll say it anyway: no one here ever tells me anything, and you should probably believe the opposite of what I say.) If Thomson Reuters decides not to get into a bidding war, that would surely have a huge effect on the dynamics of any negotiations. But ultimately, the FT belongs in a media company, not at Pearson. And although it might take a while to get there, that will almost certainly happen at some point during the tenure of Pearson’s incoming CEO, John Fallon.

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