Drop in advertising expected to hit profits at Independent group

Worries about the advertising market and access to new funds yesterday prompted a leading credit ratings agency to lower its outlook on Independent News & Media (INM), the newspaper publisher embroiled in a public row with billionaire shareholder Denis O'Brien.

Fitch Ratings, which assesses firms' ability to repay their bondholders, said the Dublin-based owner of the Independent and Independent on Sunday was likely to face a tougher economic climate in its core British and Irish markets and cut its outlook on INM to negative from stable.

Alex Griffiths, a Fitch analyst, said: "If you look at the situation in 2001, the last major slowdown, you saw global ad spending fall by 5%. If current trends persist, press is likely to be hit harder than the average.

"Given INM's cost and revenue base, a 5% fall in ad revenues could be expected to lead to a 15% fall in Ebitda [underlying earnings]. There's little question that it will largely recover in a year or two but there is a short-term potential issue."

INM's 2007 results published last month showed underlying pre-tax profits rose 7.7% to €286.1m (£228m) on record revenues of €1.67bn. It outperformed its rivals, helped by an as yet resilient Irish economy and advertising market. In Ireland, where INM publishes the Irish Independent, a leading daily, advertising revenues were up 7.6%.

INM also credited improved profitability in Northern Ireland, where it owns the Belfast Telegraph, with boosting operating profit for the UK division. Advertising growth there was 5.5%.

Fitch predicts gloomier times ahead, even in Ireland. Griffiths said: "Ireland has been growing very strongly for the last 10, 15 years or so ... but recent reports are suggesting a slowdown in 2008. As advertising tends to follow GDP [gross domestic product] movements, but in an exaggerated way, slowing for the economy means potentially something more severe happening to advertising."

Fitch also raised questions over INM's ability to repay its bondholders next year. It said the publisher and advertising company, run by Sir Anthony O'Reilly, is likely to need additional outside finance when one lot of its bonds matures in May 2009.

Griffiths said: "With the current tightness in the credit markets, there is the potential that they won't be able to access external finance, or at least not at an attractive price, should they need it."

Fitch affirmed INM's rating as BB minus, to reflect its "solid business profile", but withdrew coverage of the company because "insufficient public information" made it unable to maintain a rating on it - a rating Fitch had initiated.

The company, which also has interests in Australia, India and South Africa, has been at loggerheads with O'Brien over his attacks on its strategy, which include a call to sell off the loss-making London Independent titles.

The hostility between O'Reilly and O'Brien deepened on publication of the company's results, when INM branded the telecoms tycoon a "dissident shareholder". O'Brien, who has been steadily raising his stake in INM, hit back at the "highly personal and unwarranted attack", saying it appeared to be "designed to deflect attention away from the company's disappointing stock performance".

He says he is committed to "investing for long-term value", while the Observer has cited sources close to O'Brien as saying he intends to bid for the company and, if successful, to sell the Independent.

Katie Allen, media business correspondent
The Guardian,
Wednesday April 9 2008