Metro: desperate sell out or smart strategy?
Metro partnering with competitors Schibsted and JP/Politiken in Sweden and Denmark, is no doubt the ’story of the month’ in the free newspaper business. The deal will improve Metro’s results for 2008 significantly. The 350 million Swedish Kronar (€37m) for the Swedish deal alone are more than Metro’s losses in 2007 (€18m). Financial details for the Danish deal were not disclosed.
But whether the sale will lead to happy dancing in the Metro headquarters in London’s Fleet Street is not certain at all. And whether shareholders will be joining the dance is even more uncertain.
The problem is that the extra revenues do not improve structural results. It’s a one-off operation, with uncertain effects for the coming year-on-year results for the company.
The results could even be affected in a negative way, as Metro Sweden was always responsible for a major part of the revenues of Metro International. The Swedish operation has been profitable from the beginning; the revenues were used to launch other editions abroad. Also the Danish operation is profitable. Both markets were defined as ‘very strong’ in the 2007 annual report.
So why sell part of the family jewels and make less money in the future, as Schibsted will take 35% of the Swedish profits the next years and the Danish partners will take half instead of the 30% in previous years? A more detailed analysis of the markets affected might provide us with the answer on this.
The crucial element in the Swedish Metro sale might not be the 35% share of Schibsted but the closure of Punkt SE. This free Aftonbladet spin-off, launched in October 2006 in three editions in Stockholm, Gothenburg and Malmö has made both Schibsted and Metro very unhappy.
Schibsted expected to lose SEK 50 million (€5.4m) in 2006 with Punkt SE and furthermore an operating loss of SEK 135 million (€14.6m) in 2007. The publisher also expected the operation to be profitable in three years. However, extra advertising revenues for the Aftonbladet group were also expected.
Actual losses were probably higher while the expected profits in three years seemed to be impossible. Punkt SE lost SEK 41m (€4.5m) during Q3 2007 only - a weak quarter traditionally with low revenues but also with low costs because the paper was not published for a month.
Over the whole year 2007 Schibsted remarked of Punkt that it ‘considerably debited the results’ and that ‘it will take time before this affects the advertising revenues.’
The year 2008 did not prove to be the expected turning point; in Q1 alone Punkt lost NOK 37m (€5m). The closure, in other words, might have come as a mercy killing for Schibsted.
The problems Punkt SE caused for Metro Sweden can be summed up as ‘readership, revenues & rates’. Immediately after the launch of Punkt SE, readership of both Metro and City - the free paper by Bonnier - began to decline. But more important, advertisers began to demand higher discounts on advertising rates and used the new competitor to put pressure on both City and Metro.
The 2007 annual report: ‘Last year’s weak performance in Sweden was due mainly to poor discount control within the sales teams and a downturn in the real estate market which affected the Bostad title in Stockholm.’ As a result revenues were declining for Metro in its home market, ‘reduced margins in Sweden’ according to the publisher.
Sweden was not the only market affected. Also in France, Spain, Italy, Holland, the Czech Republic and Denmark competition sharply increased in the last years.
The Czech operation was the first to go - Metro now has a 40% minority stake in the franchise operated by Mafra (controlled by German publisher Rheinische Post). This sale also included the closure of one of the competitors, thereby hopefully reducing pressure on rates.
The Swedish and Danish sales, however, are different. After 10 years there still were no profits coming in from Prague while Denmark and Sweden were performing quite well.
Taking out Punkt SE in Sweden and making peace with JP/Politiken in Denmark is more than just selling some property to pay the mortgage. If played right, it could lead to better results for both countries - making up for lost revenues because the share in both companies is less now. But the deal could also backfire - when rates will not improve, the structural results will suffer even more.
After selling part of Sweden and Denmark, there is some air for Metro, if only temporary. However, that there still is no publisher interested in the US titles, is somehow spoiling the party.
The bleak economic outlook in the US might be the decisive factor. The closure of BostonNow, or to be more precise, the fact that no publisher was interested in buying the assets, is not a very good sign.