Mitting's musings

Brown's boasts

William Mitting — Thu, 11 Dec 2008 15:31:00 GMT

Watching Gordon Brown inadvertently professing to have “saved the world” in Prime Minister’s questions this week, I could not help but feel a tinge on anger to say the least at his smug attitude to the current economic situation.

Even if one ignores his telling slip-up and takes his boast to have “saved the banks” on face value, he deserves to be condemned. How can Brown insist that his economic policies have saved the banks when they are so far from their raison d’etre –to lend money.

Printers across the country are being faced with reduced credit terms and no access to finance as the economic conditions worsen. Without this vital lifeline, they will not be able to trade through the downturn. It is all very well for the government – it can and is simply borrowing its way out of the crisis but this option is not available for the industry.

It has to be asked if the banks are really saved if they are not in a position to lend. For, if they are not saved, the world is damned.

Don't blame the media for the economic slowdown

William Mitting — Fri, 24 Oct 2008 09:07:00 GMT

Is the global slowdown really the fault of the media? This is a question that I have had to discuss with many printers over the past few weeks as there seems to be a growing tendency to blame the media for its negativity. Often the phrase “talking ourselves into a recession” has been used with the media apparently doing the talking.

Nice as it would be that if we could write positive stories, the problems would go away, this is not the case. Blaming the media for the current global slowdown and now inevitable recession is a smokescreen detracting from the real causes: poor economic management and exuberant greed.

How influential is the media when it comes to controlling consumer spending? Will, for example a consumer not buy a new pair of shoes on a Saturday afternoon because they have read that the libor rate remains stubbornly high and banks are unwilling to lend to each other freezing up the money markets? Or, will they not buy that luxury item because they cannot afford is as their mortgage rates have gone up? Same factor, different avenues of realisation.

In the same vein, house prices are falling because they became unfeasibly expensive. The media certainly did not cause the boom in house prices simply by writing that they were increasing and no one has suggested this is the case - they increasing because banks were lending money to people who lost sight of economic fundamentals and the buy-to-let boom was allowed to continue unchecked (in 2000 there were 120,300 BTL mortgates with a maximum loan to value ration of 78%, by 2007, there were just over 1m with an allowable LTV of 85%).

We are entering a recession because we have binged on debt without any curbs from banks or government. As an economy we have let greed rule supreme (Dresdner Kleinwort’s Fear and Greed index, explained here http://www.howwealthworks.com/forum/viewtopic.php?p=4348, last year hit an all time high) and we are now paying the price, not because of media influence.

Butler, Tanner & Dennis: a phoenix in the true sense of the word

William Mitting — Thu, 17 Jul 2008 11:11:00 GMT

It is on days like today that one mourns the negative connotations of the term “phoenix” in business.

In the Greek myth, the phoenix, a bird notable for its grand red and gold coloured tail, lives for 500 years before building a nest which it then ignites and so dies. Out of the ashes rises a new, young phoenix which is destined to live at least as long as the previous.

This tale of suicide and renaissance has many similarities with the book printer Butler and Tanner. Its long illustrious history threatened to come to an abrupt end in April when former owner MPI closed its doors in the face of a bitter dispute and planned strikes from Unite the union.

So, rather than connotations of a shady business deal to wipe out debt, let us celebrate the true meaning and splendour of the phoenix in its intended guise and, as the fresh new company rises from the ashes, hope that the new bird will at least match the 157 years that its predecessor achieved.

Aside from B&T’s saviour Felix Dennis, credit is due in particular to Kevin Sarney and the management team who over the past months have shrugged off the challenges along route to reach where we are today, his dedication to the cause will stand him in good stead in the coming years at the helm of Butler, Tanner & Dennis.

The economy needs a flexible workforce

William Mitting — Fri, 23 May 2008 14:22:00 GMT

Proposed changes to legislation surrounding temporary staff would be a disaster for the print industry if they are introduced. Temporary staff play a vital role in our industry and the UK economy as a whole. The latest legislation, if passed will end the flexibility and, as such threaten the entire system of temporary employment.

A common misconception is that agency staff are a cheap solution. Companies that use them are paying not only the staff but the agency on top, sometimes the agency fees are equal to the fees the staff are being paid. The requirement for equal pay to regular staff after 12 weeks will make employment of temps after this period economically unfeasible for most companies.

In addition, the flexibility allowed by temporary contracts is a mutually beneficial two way agreement, companies can hire staff on short-term contracts and staff can leave at short notice. Temporary staff enable a company to fill a gap in its workforce on a short to medium term, recruiting extra staff for a busy period or covering a maternity leave.

Removing this flexibility will kill the vibrant market for temporary staff overnight. Naturally any abuse of agency staff must be stopped but is such abuse really so endemic as to justify this threat to the entire system?

Permanent staff rightly receive extra benefits to temporary staff. After all, they have invested time and energy in the company, they are more loyal in that they have made a commitment to that company and should be rewarded as such.

The direct mail and finishing industries are amongst the most exposed sectors to seasonal fluctuations of demand and, as such rely the most on temporary and flexible employment contracts and stand to lose the most if temporary employment is rendered prohibitively expensive.

Margins are stretched and every penny counts. The introduction of the proposed legislation will mean that companies simply do not employ temporary staff to fill the gaps instead imposing additional work loads on existing staff.

In modern day economies flexible employment is a key driver of growth. Of the Western European countries, those with the most inflexible employment laws are those that consistently deliver the weakest GDP growth in otherwise benign economic conditions. France grew by only 1.8% in 2007, Italy by 1.9%, compared to the UK’s 2.9%.

The UK stands on the brink of recession and it will need flexibility of its workforce more than ever in the coming two years. It is difficult to see exactly who this move will benefit. The economy needs a flexible workforce as temporary staff need work to pay the bills.

Preservation of Royal Mail's universal service must be at the heart of postal reforms

William Mitting — Fri, 09 May 2008 10:56:00 GMT

A radical reform of the postal service is required if Royal Mail is to be anything other than a second rate postal system and another drain on the public purse.

I’m sure we will ask where it all went wrong. When the idea of breaking the monopoly was touted in 1997 the headlines suggested lower prices and improved customer service.

Now there are far fewer deliveries, 2,500 Post Offices face closure and the inflation adjusted price of posting a letter has increased.

Yesterday the company announced it had made its first loss across its universal service. The news came as an independent review voiced concerns that the financial challenge facing the company threatened the existence of this bulwark of the Royal Mail service.

Certainly, the company has been hit by the decline of the traditional letter - total volumes fell by 3m last year. But the current constraints are such that it constricts any realistic chance it has of competing on an even keel with its increasingly strong competition.

Total privatisation is needed to keep the Royal Mail competitive. The service lost £200m across its price controlled business. Alarm bells should be ringing loud at Postcomm.

Its pension deficit needs to be addressed and the workers need to appreciate the size of the deficit and the challenges that poses, and indeed the threat to their future employment.

It is difficult for anyone to accept a reduction in what they have worked hard for or agree to work for a few more years but annual payments of £800m a year suggests that this is necessary. Royal Mail has one of the largest pension deficits in the country and if the camel's back is to be broken, this is a hay bail resting on it.

Preservation of the universal service is essential. Competition is growing in the urban areas but the rural regions remain totally reliant on Royal Mail’s service. Post Office closures are disastrous for these regions in terms of postal but also economic and social impact.

There is currently a review into the postal service. It needs to act fast an impose radical changes.

Direct mail is back, and this time it's personal

William Mitting — Fri, 02 May 2008 10:34:00 GMT

There was an air of optimism at the International Direct Mail Fair (IDMF) this week. The industry is shaking off the “junk mail” tag and breaking new ground.

The saviour of direct mail is data driven personalisation. Rather than printers and mailers, on display at this year’s fair were software packages enhancing and manipulating data for personalised campaigns and RIP technology making the pre-press process more efficient.

Indeed, the stands displayed a prevalence of the suit jacket and jeans combo favoured by successful techies not seen in such numbers since the .com stock market investor roadshows at the height of the boom.

The threat of opt-in held by the government, where houses would have to opt-in to receive any direct mail, has been removed by the government and in turn, direct mailers are doing their bit to cut waste and redefine the industry.

After all, personalised direct mail is better for everyone. We receive relevant offers, companies build up better and more lasting relationships with their clients, and waste is reduced so the environment benefits.

The challenge now is for the companies to get their data in order. The software is there to understand and process data to maximise a campaign, with DSTi’s Hi-Response among the impressive new offerings at the IDMF.

Direct mail is here to stay and its reputation will improve as the data becomes more accurate, the optimism at the IDMF was well placed and a bright future lies ahead for the once maligned industry.

Euro falls could signal the perfect storm

William Mitting — Fri, 25 Apr 2008 10:24:00 GMT

Yesterday saw the biggest fall in the Euro for four years bringing some much needed respite to Eurozone companies who have struggled under the upward pressure the rise of the Euro has placed on their cost base.

Weaknesses in the pound and the dollar due to falling interest rates as the central banks sought to increase liquidity in the financial markets by lowering the cost of borrowing, and the weakening domestic economies in the UK and the US, have pushed up the value of Euro's value reducing the costs of imports to Europe.

However, underlying the fall in the Euro are some concerning factors suggesting that the credit crunch is spilling over into Europe, which has, outside the financial sector, largely weathered the storm.

In the UK and the US there is a simple reason for the credit crunch and the prospect of recession: debt. We have binged on debt in every walk of life, spending on credit cards, buying hugely over-inflated homes by taking out more debt, running or being employed by companies that have fuelled their growth through debt.

The debt has now run out and all those who have borrowed are left with the financial equivalent of a hot potato, unable to refinance to reduce borrowing costs or borrow more to fuel further growth.

Cue, the fall of the pound and, by association, the rise of the Euro; the fall of the cost of our exports and the rise of the cost of European exports. It is something of a double whammy for the Eurozone companies selling to the UK and beyond as the purchasing power of their customer declines as the cost of production goes up.

Yesterday’s dramatic falls were largely on the back of a series of business confidence surveys in France, Germany and Belgium that showed a downbeat outlook in those countries. Spain is suffering under a similar housing slowdown to the UK which added to the woes.

It is a sign that the Euro is not immune to the credit crunch as some had hoped. Even these countries that have not binged on debt have been dragged into the ring and will have to fight alongside us to recover.

With poor economic data continuing to come from Japan, investment bank Nomura reported a 153.9bn yen (£745m) quarterly loss this morning; the Shanghai stock exchange continuing to fall, it has lost 50% over the past few months; and now the Eurozone crisis in confidence, it is beginning to look like a perfect storm.

I still have faith in magazine printing!

William Mitting — Tue, 15 Apr 2008 12:37:00 GMT

I find United Business Media chief executive David Levin’s negative outlook on the future of print both disappointing and encouraging. He states that marketing spend “is expected to be redistributed away from print and towards online media, events and data products” and refers to the “structural shift” away from print revenues.

Undoubtedly print is facing challenges from the internet and UBM’s decline in print revenues reflects that but it is almost as if Levin is leaving print to the wolves as UBM heads off to pursue more lucrative opportunities. Data is one such opportunity and UBM’s results reflect that with a 150% increase in profits.

Whilst it makes good business sense to move into these markets, I can’t help but feel a little disappointed by UBM’s attitude. If every managing director focused solely on making a quick buck rather than offering a service and remaining true to an industry for which they had passion every business in the world would just sell mortgages to people who can’t afford them.

UBM joins Reed Elsevier in the exodus from magazine printing and herein lies the opportunity and the source of my encouragement. I firmly and wholeheartedly believe that print has a future in the magazine market and that the internet is an opportunity rather than a threat. It is up to us in the publishing industry and printers to come up with innovative ways of growing print revenues. So as the likes UBM and Reed Elsevier move out of the market there is more room for us to operate and drive print through the decades.

Crisis? What crisis?

William Mitting — Fri, 11 Apr 2008 11:25:00 GMT

If you read the papers this morning you would be forgiven for thinking the world was falling apart around us. House prices are falling, inflation is rising as interest rates fall, interest rate falls have not led to cuts in bank lending rates etc etc…I am a potential first time buyer living in London. At the moment, I have no chance of buying even the smallest one bedroom flat anywhere in London. I feel like a printer. My costs are rising, my margins are falling as a consequence and my goal is being thwarted by ridiculous prices in the marketplace. The problem in the housing market is that too many people have stretched themselves to the limits with 100% mortgages at over five times their earnings while interest rates have been benign. These people are essentially bankrupting themselves albeit with the help of lenders. Compare that to the print industry where many companies have taken on too much debt to sell the wares too cheaply with no discernable margin. These people are essentially bankrupting themselves, albeit with the help of print buyers.Both markets need a correction. Both markets need prices to return to sensible levels that can sustain the market and not pass wealth outside the central supply chain and into the hands of third parties. So I want prices to fall because it is not a reflection of the weakness of the economy, nor will it be the cause of such weakness. On the contrary, the economy is stronger if young professionals are out buying consumables, whose disposable income is the target of marketing campaigns, and who do not have to spend every last penny servicing a mortgage that ultimately enriches the lender, not the vendor. Prices for printers and first time buyers need to return to sensible levels. Falling prices are not always bad news. If the price of paper fell would the print industry call it a crisis? Oil? Ink? Certainly there are concerns ahead and an economic slowdown, a brief recession (although all recessions begin as “brief”) may be on the cards, but as I argued last week, this time round, print will not bear the brunt.

Optimism while Rome burns – are we mad?

William Mitting — Fri, 04 Apr 2008 10:44:00 GMT

With the global banking sector in meltdown, you would forgive printers for a having negative outlook. However, the latest BPIF Directions survey released yesterday shows exactly the opposite with almost half of the respondents believing their spring profits will be better this year than last.

Are we kidding ourselves, blind to the realities of the current financial crisis, or is it possible that the current storm raging in the banking sector will not rain on the print industry?

Across the financial world the venerable have become the vulnerable. Indeed, the shockwaves have been felt outside the City and in many other industries. Printing has not escaped unscathed as the demise of Quebecor World stands witness.

The debt party is over and, as is all too often the case, the calm that follows the party has been quickly replaced with a severe hangover. But has print really thrived in the years of plenty that we have recently experienced? And if not will it suffer in the decline?

Over the past five years, while bankers have been buying up small islands on the back of their bonuses and Brown has been hailing the astonishing growth across the UK, the print industry did not join the dance, to use Chuck Prince, now former head of CitiGroup’s unfortunate analogy.

Margins have fallen dramatically; private equity investment, itself a product of the debt boom, has driven down prices and the bull market that thrived during the boom and saw the value of the FTSE 100 almost double since it bottomed out in 2003 has, if anything, closed off the possibility of a floatation to companies in the print industry, dominated by smaller players.

Alistair Darling has called for a return to “good old-fashioned banking” and the credit crunch may bear out his wish. Asset-backed lending, the most common form of finance for printers, is a classic example of old fashioned banking and more competition in this marketplace would benefit printers. It may be more expensive in the short run but an increase in regulation will probably be of ultimate benefit to the ABL industry.

In addition printers have not been as guilty as other industries on piling on the debt to fund a mirage of growth so will not find themselves short in the oncoming crisis. Quebecor excepted – its parent company thought it acceptable to load up $5bn of debt.

Indeed, it is a good thing for the industry as a whole that the debt pool dries up. Each printer can now compete on an even keel with private equity backed loss leaders unable to push prices lower and lower and debt weighing heavily on the bottom line.

There is no doubt that a prolonged recession would hurt the print industry as it would the rest of the UK. But the factors driving this recession, debt and overinvestment are not diseases plaguing in the industry today. Print has not drunk from the poisoned chalice; it is not unreasonable to suggest that it will not therefore be poisoned.

The Darling buds of March

William Mitting — Thu, 13 Mar 2008 12:59:00 GMT

For Alistair Darling, spring has come early this year. After a long harsh and tempestuous winter for the financial markets his first budget makes light of the impact of the credit crunch as he predicts that growth will return to near normal levels after a brief down turn this year.

His revised forecast for this year of 1.75 to 2.25% looks likely to tend towards the lower level, potentially resulting in the lowest growth for over 15 years, as consumer spending slows.

But it is his expectation that growth will return in 2009 that worries me the most. As has been reported he has only just been able to keep within the target debt range of 40% of total income by raising £2.5bn of taxes. Unless his projections on growth are spot on, this levee will be breached.

It is my opinion that Darling has seriously underestimated the long-term outlook for the credit crunch. It seemed in his speech a mild inconvenience rather than the looming economic disaster that it is.

The US may very well already be in recession and our fortunes are very much dependent on the US’s. However, another iceberg is on the horizon as our own housing market stands on the brink of a downturn stemming growth and further impacting on consumer spending.

What does this mean for print? Well, print is inextricably tied to consumer spending and if that falls so too will print spend. Public sector cut backs will also impact on the number and value of tenders going to market.

Certainly there was some good news for SMEs in yesterday’s budget (see next week’s PrintWeek) but these will be wiped out if Darling’s gamble on the recovery of the economy sours. March is an early time for buds to grow and it may well be much longer than Darling has bet before they blossom.

Is it time to act to tighten administration legislation?

William Mitting — Thu, 31 Jan 2008 12:18:00 GMT

Administration is a sad inevitability of modern print in the UK. All too often companies have shaved their margins once too many and find themselves struggling to pay their creditors and, without the possibility of financial assistance, are forced to call in the administrators.

However, it is not just the company who suffer as suppliers also bear the brunt of any administration proceeding. Increasingly it seems, companies are being pre-packed or reinstated as Phoenix companies leaving the creditors out of pocket.

I spoke with Daniel Smith a print specialist at Grant Thornton about the pre-pack sale arrangement. He explained that administrators have a duty of care to ensure that the best possible result for everyone is achieved.

He added that at Grant Thornton, a pre-pack sale is only ever exacted under exceptional circumstances where running the business for enough time to find a buyer would be of further detriment to staff and suppliers.

But are all administrators as thorough and responsible as Grant Thornton and does the law sufficiently cover the risk that suppliers take? No administration proceeding will deliver total results for all parties, if that was the case the company would not need to call the administrators in.

However, my concern is that it is getting easier for companies to use administration as a quick-fix in the same way that IVAs are wreking havoc on the personal finance sector. The government must act now to tighten legislation to ensure that during this difficult year pre-pack sales and Phoenix companies do not compound the difficulties the industry already faces.

It's not all doom and gloom...

William Mitting — Fri, 18 Jan 2008 11:55:00 GMT

Recent closures have painted a bleak picture of the print industry’s prospects for 2008. But, as it is Friday, I thought I would bring some good news courtesy of an interesting study by Begbies Traynor which reveals that all may not be as bad as it seems.

The Red Flag Alert statistics for Print & Packaging 2007 report assesses the financial insecurity of companies in a range of sectors. It identifies companies with “significant” problems, and those with “critical” problems, namely a CCJ totalling £5,000 or more and/or a Winding-up Petition related activity.

Certainly some of its findings are not encouraging. It found that the number of companies in the print and packaging (P&P) sector with critical problems rose from 85 in 2006 to 99 in 2007, with November 2006 recoding the highest number of companies slipping into “critical” over the past two years (26).

However, a comparison with other sectors puts this in comparison. Of the ten main industries covered, print had the lowest percentage of companies with “critical” or “significant” problems with only 2% of companies in each of these categories.

Construction fared the worst with 12% of the companies in that sector having “significant” problems and 20% “critical”. The study also found concerning statistics in the retail and manufacturing sectors.

Without a doubt this is going to be a tough year and the signs are already evident that consolidation is here and it is going to be painful. But these statistics go a long way to showing that all is not as bad as it may seem.

Bankruptcy is a very real possibility for Quebecor World

William Mitting — Thu, 20 Dec 2007 15:07:00 GMT

If a week is a long time in politics, a day is a long time in business, and last Thursday must have felt like an eternity for Wes Lucas, now the former CEO of Quebecor World Inc (IQW). Thursday was the day that Quebecor’s shareholders reacted to the news that RSDB had rejected the $340m bid for its European division by sending IQW’s shares plunging to a record low of $1.18.

But how real now is the threat of bankruptcy for the printing giant that once dominated the North American market? I’m sad to say it looks a distinct possibility. IQW’s balance sheet is terrifying. Following the fall in its shares its market capitalisation stood at less than $130m. In January it was valued at almost $2bn; in January 2003 double that.

Over the past 12 months the company’s debts have risen from $1.9bn to $2.24bn, or, and even more importantly, from about 1.1 to almost 20 times its total market capitalisation. In addition to its long-term debt, the company has around $1.8bn of other liabilities meaning that it now faces financial liabilities to the tune of $5bn.

It gets worse. The credit rating agency Standard & Poor this week downgraded the rating of the company’s long-term corporate debt to CCC, from B–. At the same time it downgraded the rating of its revolving credit facility, which currently stands at around $740m to CCC citing the belief that this will soon need to be extended. Moody’s soon followed suit.

With the credit crunch in its infancy and uncertainty paralysing the money markets (where debt is collateralised and sold off enabling companies to refinance or increase their debt levels), Quebecor’s CCC rating has essentially rendered it a financial leper as their unsuccessful attempt to refinance at B- in November proved.

Further misery faces the company as Quebecor is tipped by analysts to breach its debt covenant with its Q4 07 or Q1 08 results. Debt covenants are contractual terms in a loan that can mean it is in default even if you haven't missed a payment; ie the lender will stipulate that if the balance of debt exceeds x times EBITDA then you have to repay the loan. Unless it can earn a reprieve it could find itself in very hot water.

Is there any good news? Perhaps: IQW is asset rich. The company has over $5.5bn of assets on its balance sheet, predominantly made up of physical assets such as property and equipment ($2.1bn) and goodwill ($2.2bn). This sounds like a safety net but every silver lining has a cloud and if there is one thing that the RSDB veto has taught us, it is that assets in a distressed business are not worth their face value.

John Caris, CEO of RSDB, insisted that the $341m price tag it had agreed on Quebecor’s European division was “a fair asset value” which, in view of IQW’s recent retooling programme, seems reasonable in terms of the value of its physical assets. However the shareholders did not believe it to be a fair real value in light of the business’ balance sheet.

Following the company’s recent turmoil, the value of its goodwill, notoriously difficult to price at the best of times, will have dropped substantially. In addition the possibility of a fire sale, perhaps forced by any potential breach of covenant, will see the physical assets sold at well below their face value, so the total assets the company owns is way below the $5bn mark and therefore, way below the current value of their liabilities.

Salvation at this point therefore can only come via a bid for the company. Rumours are that private equity players KKR and Cerberus are among the vultures circling Quebecor World. The chances are that these guys will buy the operations whole, patch them up and sell them on, either as one group or, more likely, following a break-up.

Cerberus has recently demonstrated a penchant towards distressed companies (the bid for Northern Rock being one example) and my money is on them, especially if they lose out on Northern Rock. RR Donnelly and Transcontinental are also touted as trade buyers, although it is highly unlikely that they will want to acquire IQW in its entirety, perhaps sharing the meat between them and leaving the carcass to rot.

However, if a bid fails, whether through Quebecor’s shareholders refusing to accept a nominal fee or no buyer coming forward, it is hard to see any circumstances in which the company could avoid bankruptcy. In a more favourable credit climate perhaps they would be able to refinance and reduce payments until they had got their house in order but, with the credit crunch in full swing, it looks like being a very bleak winter indeed for IQW.

Discounting the Dutch discount

William Mitting — Tue, 18 Dec 2007 12:59:00 GMT

Shareholders in The Netherlands are flexing their newly pumped muscle as Quebecor World Inc found to their dismay last week when the shareholders of RSDB torpedoed the proposed merger of their European operations.

The vote, which came as a bolt from the blue for the CEO John Caris, is indicative of the new found power held by Dutch shareholders. Traditionally, a phenomenon termed the “Dutch discount” has caused Dutch shares to be valued at up to 20% lower than equivalent shares on other European bourses due to the relative inability of shareholders to wield any power over the management team.

However, the rise of activist shareholders and the introduction of a new company law bill concerning corporate governance has put paid to the discount and is claiming scalps across the country.

The best example of the rise of shareholder power was the sale of ABN AMRO. This time last year you would have had the management team at ABN in stitches if you had suggested that in 12 months the Netherlands’ largest bank, with roots tracing back to the Dutch East India Company, would be in foreign hands.

But it took just one letter by a hedge fund bizarrely titled Children’s Investment Fund (TCI) which owned just over 1% of the company and the banking giant was up for sale following a shareholder revolt.

Other notable companies to fall foul of shareholder’s new found power include VNU, the Dutch business information giant whose shareholder blocked the £5bn acquisition of IMS Health, a US health market research company; and the Dutch group Stork that was broken up following a lengthy legal battle.