Trinity Mirror's share fall is verdict on chief's five years

Sly Bailey, Trinity Mirror's chief executive, should have felt the noose tighten on Wednesday. She has run the newspaper group for just over five years, and the share price has gone from 370p when she arrived in February 2003 to 41p on Wednesday morning. That is only a tad more than the price of her group's Daily Mirror, which led with a story about Paris Hilton being snubbed by Cristiano Ronaldo. Ms Bailey would have to hope that her chairman, Sir Ian Gibson, freshly recovered from the Northern Rock debacle, is feeling more accommodating than the Portuguese footballer.

To be fair to Ms Bailey, this month's rout in Trinity Mirror's shares reflects market hysteria. The shares have been too cheap all year. At the low point, Trinity Mirror's 300 newspapers were being valued at less than two times profits. Those are the sort of valuations the market gives a company that's on the way out. The whole company was valued at £106 million, meaning each of the Mirror's 1.47 million buyers are worth £72 each, the equivalent of just six months' continuous purchasing of the daily. Perhaps at that point the City believes that all of Britain will become blinded by a Triffid invasion, and hence unable to read. One can only wonder how investors would react if something genuinely serious happened.

Now, of course, there is no doubt that newspapers face big structural challenges; there is no doubt that buying is in slow decline; there is no doubt that advertising is tumbling - Gannett's disclosure that property advertising in its local newspapers had fallen by 37 per cent in June is the most frightening figure so far. However, everything has a price. Analysts reckon that the Daily Mirror alone will earn £65 million this year, down maybe a tenth; it (like all Trinity titles) operates at a profit margin of more than 20 per cent, high for a national newspaper. The company as a whole is expected to generate operating profits of £150 million this year, lower than hoped, but so far by only a tenth. Although the group is grappling with £425 million of debt, earnings would have to drop by a third before it breached its overdraft conditions. It is, simply, undervalued.

Fortunately for Ms Bailey, publishing Trinity Mirror's overdraft terms did the trick, and the realisation that Trinity Mirror is not close to going bust sent its shares soaring - to 73p last night, they have nearly doubled in two extraordinary days of trading. Had the release of what is frankly incomprehensible data to most mortals failed to rally the stock, it is hard to see what the board could have done other than to dismiss Ms Bailey. It would be insane to try to sell the company or the newspapers at the bottom of the market, and years of obsessive cost-cutting have left few obvious savings.

The recovery, though, is far from secure, even if at a share price of 73p Trinity Mirror still looks like a bargain buy in the current crisis, at £200 million. But this is not about buying the whole company. Richard Desmond, the thought of whom should frighten Mirror journalists when they turn out the lights, reckons a takeover would still be too expensive. Mr Desmond may have £150 million of cash to play with, but the Daily Express's owner is right when he reckons that the true value of a takeover is probably beyond £800 million, allowing for a bid premium, debt and a top-up for the pension funds.

Yet, who needs to own the whole business? Somebody could seize a strategic stake, which should show a considerable profit when the economy recovers, and ensure that it is they who control the destiny of the tabloid without taking on all of the liabilities. Given that the Mirror is the only permanently Labour-supporting newspaper, its fate is important to some (indeed trade unions might find it a better investment to band together and protect a friendly newspaper than to bail out the Labour Party).

Moreover, there is something else that an investor could do: alter the strategy. The Bailey plan has seen Trinity Mirror being run for profit in a risk-averse way. Promotion investment is limited - you could be forgiven for not noticing that there is a new-look Mirror at a time when The Sunday Times is spending to publicise its redesign. And although some websites have been acquired, there is not enough of a digital strategy beyond bingo, and certainly not enough to act as a hedge against structural decline. Instead, another round of redundancies is likely, which will prop up short-term profits - at a time when smart media owners should think about investing for the eventual upturn.

The cold, hard truth here is that Trinity Mirror's share price fall is more than just a product of sickening hysteria. It is also a judgment on the half decade of Sly Bailey's leadership. In that time it is not obvious that the company has progressed enough; it has not recycled its profits in newspapers to capture enough growth elsewhere, whether abroad, like Independent News & Media, or in electronic information, like Daily Mail and General Trust or the Guardian Media Group, the owner of Auto Trader. It is not enough to blame a company's problems on irrational investors and an advertising downturn, and that should make Sir Ian Gibson think

Dan Sabbagh
The Times
29th July