Thursday 19 April 2018

Analysis: In a house divided shareholders take the financial hit

INM ceo Robert Pitt and chairman Leslie Buckley. Photo: Gareth Chaney Collins
INM ceo Robert Pitt and chairman Leslie Buckley. Photo: Gareth Chaney Collins

Donal O’Donovan

Independent News & Media (INM) shareholders suffered a horror show during the past week, watching the value of their investment plunge as much as 30pc in a matter of just days.

Some good news yesterday, when management announced a deal that resolves a long running pensions dispute helped the stock claw back gains.

But overall, the picture was stark.

After closing at 13 cents a share going into the weekend on July 14, the shares were as low as 9 cents by last Thursday.

Yesterday’s partial share recovery wasn’t enough to butter a lot of parsnips, or shift the bleak narrative that had developed around the company.

Missing in this particular narrative is the fact that INM is sitting on around €85m in cash, and profitable.

Financially the business is well insulated against even the latest challenges.

Profits in 2017 are expected to be about €30m, even after this week’s warning.

But the story around INM has developed for a reason, and it burst forth again this week.

First, on Monday, it emerged that INM CEO Robert Pitt might not vote in favour of resolutions the group’s board will put to shareholders at its annual general meeting next month.

The CEO has “reserved his position” on the votes, INM chairman Leslie Buckley wrote in a letter to shareholders outlining the agenda for the  annual general meeting.

The letter didn’t say which of the seven resolutions being put to shareholders Robert Pitt might not support, but speculation has focused on the re-election of non executives directors, including the chairman.

That’s because INM’s CEO and chairman had a high profile falling out last year, over a potential bid for radio station Newstalk.

The dispute is understood to have come down to the price INM might pay for the station – with the CEO supporting a lower valuation than the chairman.

Complicating matters is the fact Newstalk is owned by INM’s biggest shareholder Denis O’Brien, who’s a close and long time business associate of Mr Buckley.

In the end the deal never really got off the ground, but afterwards the CEO made complaints – initially to INM’s senior non-executive director,  Jerome Kennedy, and subsequently to the Office of the Director of Corporate Enforcement (ODCE).

Various actions have followed – including the board commissioning an independent review by barrister David Barniville, who’s due to report back before the AGM, but the situation has never really been resolved.

Monday’s letter dredged the issue back to the fore, and reminded anyone who wasn’t paying attention that the breach between CEO and chairman hasn’t been closed, while both remain in place at the top of the business.

As CEO, Robert Pitt’s own vote as a small shareholder won’t impact the final outcome of the AGM, but a CEO potentially failing to express confidence in his board would be a step into the unknown.

The chairman’s letter to shareholders included other important points.

INM won’t pursue acquisitions pending the outcome of the independent review – and presumably any action potentially taken on the back of its findings.

That’s important because buying alternative income-generating assets is a core part of the group’s stated strategy. It’s now on hold, at best.

If Monday’s letter helped tip shares lower, Wednesday’s news hit the stock like a freight train.

The company issued a shock profits warning, citing a litany of “challenges” which together will have a material impact of the bottom line this year.

While falling circulation and advertising were to the fore in the circular announcing the warning, in reality they’ll have been factored in by serious investors.

Indeed INM’s core titles are understood to be well ahead of rivals in holding onto readers, and growing their share of a declining market.

Less anticipated was the news that unexpectedly high libel payouts in a number of recent cases will hit profitability.

Potentially massive payouts and unpredictable juries make Irish libel law a high-risk lottery for media firms, INM is no exception, but a run of recent cases prompted managers to re-provision against any further losses – in essence going through outstanding legal cases and setting aside more cash in case they go against the company.

Most unexpected of all was that costs stemming from the fallout at board level are so large as to be causing a hit on trading.

Lawyers don’t come cheap, with the costs of the ongoing independent review and engagement with the ODCE understood to be running into seven figures.

It means the battle of the boardroom is sapping INM’s finances as well as the group’s ability to adjust to an already bruisingly tough market  – by deploying its considerable financial reserves into M&A.

Right now the country’s biggest and most important private sector media group is in something like limbo – at least until the August 23 AGM.

Strategically it is hard to see how the business can move forward until the impasse at board level is broken or resolved.

Investors, who – not withstanding the latest profit warning might otherwise focus on the strength of the financials – are unlikely to flood back to INM until something gives at the top.

Online Editors

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