Quoted Business, A Briefing For Quoted Companies. Let Us Entertain You - Exploring The Media Sector, December 2008

As the global financial crisis takes its toll, we examine its

impact on different parts of the media and entertainment industry.

We also provide some pointers for survival in the tough times

ahead.

EDITOR'S VIEW: MEDIA IN THE SPOTLIGHT

Aim is always likely to experience a sharp decline in an

economic downturn. John Cowie discusses the relative performance of

media sub-sectors.

It will be no surprise to anyone that Aim has performed badly

over the past few months. Indeed, the FTSE Aim All-Share Index has

suffered a much sharper decline in the last 12 months (down 58%)

than that of the Main Market (the FTSE All- Share is down a

'mere' 40% as we go to press).

This is exactly what economists would expect in a downturn from

a market that seeks to attract growth businesses: the beta of their

constituent companies ought, on average, to be greater than one. In

other words, they should demonstrate higher volatility than a

basket of 'normal' (for which read larger, established

company) shares. To put it another way, in the good times, Aim

should outperform the Main Market, rewarding greater risk with

greater return. In the bad times, it should fall more sharply than

the Main Market.

Clearly, some industry sectors perform better or worse overall

than others in a downturn. In this issue of Quoted

Business, we examine the media sector in some detail and

compare its recent performance with the index as a whole.

The Aim media sector, like Aim as a whole, has fallen by 58% in

the last year. Within the sector, the only three subsectors which

have fared slightly better than this average are media agencies,

showing a 35% decline in the last 12 months, broadcasting and

entertainment (43%) and publishing (45%). Rays of hope within the

overall gloom are online market research houses Research Now and

Toluna, whose share prices have risen by 16.4% and 9.6%

respectively in the last year. Both sit within the media agencies

sub-sector. The only company of the 12 in the publishing sub-sector

to have bucked the overall downward trend is international

business-to-business (B2B) media company SPG Media Group, which

recorded share price growth of 2.9%.

In fact, out of the 66 Aim companies in the media sector, the

companies mentioned above are the only 3 which have grown over the

last 12 months.

So, what does the near and long-term future hold for media

companies on Aim? For answers, we turned to a number of media

figures to find out what the big challenges are now, what the

issues are for the future and how positive they are about the

sector generally. Are there strategic lessons to be learned and

deployed over the coming months in the various media

sub-sectors?

To set the scene, Smith & Williamson's Andrew Wilkes, a

media specialist and a director in our Corporate Tax division,

explains the recent performance of media stocks and gives his view

on the outlook, opportunities and threats ahead for the sector.

COMMENT - MARKET FALLS OUT OF LOVE WITH MEDIA FOR THE

MOMENT

Andrew Wilkes looks at how listed media companies are faring in

the current economic climate.

There is no doubt that the worsening state of the global economy

has, and will continue to, hit quoted media companies. Analysts are

concerned that diminishing investor and consumer confidence will

lead to a downturn in advertising, upon which many media stocks are

dependent for their revenues. Earnings forecasts are being revised

downwards and companies that are particularly exposed to the

advertising sector, such as broadcasters, newspaper publishers and

advertising and marketing agencies, have seen their share prices

slump, with some trading at levels between 60% and 90% below those

of just a year ago.

This justified pessimism about the outlook for advertising

appears to have led investors to consider the entire quoted media

sector as 'toxic'. However, there are a number of quoted

companies whose business models do not depend on chasing

advertising spend at all, or who are niche businesses benefiting

from the migration of advertising from traditional print media to

online. Television production companies, film distributors, STM

(scientific, technical and medical) and B2B information publishers

with subscriptionbased revenues and digital media pioneers have all

seen their share prices fall ? not as far as their

advertising-dependent peers, but well in excess of the market

generally.

Cheap deals for the taking?

Little wonder then that trade acquirers, private equity, and the

managers of some of these apparently unloved companies, are

beginning to think there may be some buying opportunities in these

depressed markets. Within the television production space, the

executive management team at Tinopolis took their company private

with venture capital backing earlier this year. RDF Media's

management have also signalled their plans to make an offer to

shareholders.

However, while low share prices might mean some companies appear

to be cheap by historical standards, the current high cost or

reduced availability of debt means that willing buyers may not

always be able to fund their interest. Specialist information

providers Informa and Wilmington, and marketing services company

Creston attracted the attention of private equity earlier this

year. But, in all three cases, discussions were called off when, it

is believed, the private equity houses involved could not raise

sufficient debt to support their interest. Doubts have also been

recently expressed about the funding available to the RDF Media

buyout team.

Prepare for the upturn

So what should the management teams of depressed media stocks do

against the current economic backdrop? Nobody can know how long the

current economic difficulties will last, but we can be sure that

recovery will eventually come. And, while media stocks tend to

underperform during a downturn, they are usually among the first to

bounce back when those green shoots of recovery are sighted. So the

priority for quoted media companies must be to focus on trading

through the downturn ? use this time to review the cost

base, maintain banking relationships, and, where possible,

concentrate on building strong relationships with customers and

clients. They should also take time to assess the potential

opportunities for their businesses, so that they can take full

advantage when the upturn begins.

CLIENT INTERVIEW - STAGECOACH THEATRE ARTS

Quoted Business speaks to David Sprigg, joint managing

director and founder of Stagecoach Theatre Arts, about how the

business is performing at the moment.

Stagecoach Theatre Arts is an Aimlisted, market-leading

franchise network of part-time performing arts and sports schools

for youngsters. The business has yet to see much negative impact

from the downturn in economic activity and managing director David

Sprigg believes that the sector is particularly resilient. In fact,

Stagecoach's network fees in June and July grew 5%

year-on-year, cash balances hit a peak of £2.3m in June and

it opened several new UK schools in September.

Bucking the trend

"Our underlying business is actually doing better than it

was a year ago," says David. "This is our third recession

and we've survived all of them since we started the business in

1988. We put it down to the strength of the brand and the fact that

parents tend not to cut back on children's education in tougher

times, whereas they will cut back on luxuries such as holidays. We

are confident of future success despite having to make a small

increase in our term fees."

In 2006, when Stagecoach slipped into losses, it carried out

restructuring and cost-cutting measures. "We'd geared up

for growth that didn't materialise and this was hitting

profitability. We managed to rationalise four divisions into a

single head office through natural wastage without any compulsory

redundancies."

This has led to a significant reduction in the group's total

cost base, from £5.95m in 2007 to £5.65m in 2008. The

company grew its franchise network fees to £26.5m in

2007.

Dealing with the credit crunch

"We have a great track record with our franchisees and have

never had a failure," explains David. "However, the

credit crunch is affecting prospective franchisees' ability to

raise finance. Until recently, HSBC usually fast-tracked

franchisees by, for example, giving credit approval on the same

day. But now they look at lending on a case-by-case basis. It's

also harder for existing franchisees to find a buyer if they want

to move on."

Spend on marketing is a key requirement of every Stagecoach

franchisee's contract. "We benefit from this as the first

thing that many smaller operations do when times get difficult is

to stop marketing, whereas our franchisees are contractually

obliged to continue theirs. More than half of our student

recruitment now comes through our website. When smaller players

fall away we also benefit from such things as a better choice of

venues."

David explains that they are seeing many businesses in the

sector up for sale ? around one a week at the moment.

They tend to be small, independent, sub-£2m turnover

franchise operations. We suspect that the owners are putting

themselves up for sale before they go bust and we expect to see

more of it.

We have a good cash position and if an acquisition

opportunity came along, we would also anticipate support from

existing shareholders. We have spoken to a few of these...