Does the Telegraph bid add up?

Analysis
By Ben Richardson
BBC News Online business reporter

The Telegraph is seen as the jewel in Hollinger's newspaper stable

It's easy to get caught up in the thrill of an auction.

To forget sound business sense when facing down rivals in a flurry of bids.

But what about when the buzz fades? How often is the winner left holding a lemon?

On Wednesday, the Barclay brothers won a bidding war for the Daily Telegraph, Britain's best-selling broadsheet newspaper.

How much?

The expected sale price of £665m ($1.2bn), however, has raised eyebrows.

There is a scarcity of quality national newspapers on the UK market Simon Baker, SG Securities

Many City analysts reckon that the billionaires are overpaying for the Telegraph, the Sunday Telegraph and the Spectator magazine.

They point to the fact that circulation for the newspaper industry as a whole is sliding under pressure from new media sources such as the Internet.

The UK, meanwhile, is a particularly savage market with papers often embroiled in price wars.

A slump in advertising revenues, prompted by the global economic slowdown, has further dented earnings.

Some even say that what attracted investors to the Telegraph was its political clout and not its earnings outlook.

Budget busting

Simon Baker, an analyst at SG Securities in London, said the cachet of the title meant that some bidders were willing to stretch their valuations.

BARCLAYS IN BUSINESS Media - Telegraph group (Daily and Sunday Telegraph, Spectator), The Scotsman, The Business, printer JCM Media Property - hotels including the Ritz, and Howard Hotel in London and Monte Carlo's Mirabeau, casinos Retail - Littlewoods Shipping Profile: The Barclay brothers Q&A: Battle for the Telegraph

"That is a more subjective premium," he told BBC News Online. "And people will pay what it is worth to them. I couldn't see £665m."

The Barclays, twin brothers who live in the Channel Islands and own the Scotsman newspaper and London's Ritz hotel, obviously could.

And, according to Steve Barber of accountancy firm Ernst & Young, the maths does add up.

"As a multiple of profits the price may appear to be enormous, but compared to revenues it's not outrageous," he said.

The purchase price "by UK standards, relative to other national and regional newspaper sales, it's not that high," Mr Barber explained.

Tough choices

According to the latest figures available, the Telegraph group had revenue of $482m (£265m) in 2002 and made a profit of $48.1m.

The company's printing plant may cause problems

UK newspaper rival Trinity Mirror, publisher of the Daily Mirror, by comparison said it had earnings of £173m in 2003, on turnover of about £1.1bn.

That means the Telegraph's profit margin is about 10%, compared with almost 16% at Trinity Mirror.

The Barclays may be able to wring some cost savings out of their newspaper titles, though most observers say that these are not likely to be significant.

The new owners also will have to address the question of joint ownership of its printing facilities with disappointed suitor, Daily Express owner Richard Desmond.

Should the sale of the Telegraph go through, Mr Desmond will have the right to buy out his partners in the West Ferry plant.

"The Barclay brothers' biggest immediate challenge will be negotiating on the West Ferry contact," said Mr Barber.

Hard sell

Another key component in the equation is the position of the advertising cycle.

Telegraph readers are 56 years old on average and loyal to the title

Spending appears to be pulling out of its trough and the Telegraph is well placed to benefit from any upturn in business, analysts said.

Circulation, while under pressure, is holding up better than at other national titles.

ABC research estimates that the paper sold an average of 916,205 papers a day during the six months between November and April of this year.

The Times of London sold a total of 648,097 during the same period, with the Financial Times racking up sales of 439,488 and the Guardian 378,703.

Ernst & Young's Mr Barber is optimistic about the outlook for the Telegraph, its sister paper and the Spectator.

Good times?

"The overall future for the titles should be positive and circulation figures should not be dented by the deal," he said.

The Barclay brothers have long sought to own the Telegraph

"If anything sales figures could improve in the short-term because it will bring stability, and decisions that have been on hold for the last six months to a year can finally be made."

The Daily Telegraph isn't out of the woods just yet and the Barclays may have to wait a while longer in their quest to own the paper.

Lord Conrad Black, who was ousted as chief executive of Telegraph group owner Hollinger International amid accusations of taking unauthorised payments from the firm, has threatened to block their purchase.

Legal wrangling apart, analysts reckon that investors' appetite for the paper is unlikely to diminish.

"There is a scarcity of quality national newspapers on the UK market," said SG Securities' Mr Baker. The Telegraph is "an asset that is highly sought after."