Investors were given a fascinating glimpse into a possible future for the UK newspaper industry this morning. Trinity Mirror (LSE: TNI), which owns the Daily and Sunday Mirror, revealed that it’s in talks to acquire Express Newspapers, which owns, yes, you guessed it, the Express.
Trinity had previously been considering purchasing a stake in Express Newspapers. But I believe the prospect of owning the Express outright paints a very different picture for investors.
A special situation buy?
There’s not much doubt that printed newspapers and print advertising are in decline. Trinity Mirror’s revenue is expected to fall from £713m to £626m in 2017, and then to £592m in 2018.
And yet this remains a very profitable business. The shares offer a 6.2% yield that’s covered comfortably by free cash flow. Net debt is pretty insignificant, and although the group’s pension deficit is a concern, I don’t think it’s a deal breaker.
One remarkable point is that the group’s stock trades on a P/E of 3. My reading of this ultra-low rating is that investors are determined to extract as much as from the business as possible (through the high yield) before it goes bust.
Is this too pessimistic?
Combining the Mirror and Express newspapers into one group could generate some attractive cost savings. I suspect that both journalism and printing costs would be cut, while a larger combined readership could attract higher advertising rates.
Although we don’t know much about the profitability of the Express, Trinity boss Simon Fox presumably believes he could make a profit from the newspaper.
I believe there’s a chance that a combined business could generate a lot of cash for shareholders for a period of time. The question is how long that period would be. Could the business adapt to a profitable long-term model?
These are difficult questions, and I don’t know the answers. But I think there’s a chance that buying Trinity Mirror shares today could be a very profitable decision.
How safe is this 6.6% yield?
Satellite internet provider Inmarsat (LSE: ISAT) was one of the pioneers in this industry. Setup in 1979 to provide telephone services for ships at sea, it’s grown into a £3bn company which provides satellite broadband to ships, airlines and many other organisations.
Unfortunately this growth has come at a price. Investing in the latest generation of satellites has been costly, leaving the group with net debt of $2bn. At the same time, market conditions have softened in some sectors.
Analysts have responded by cutting their 2017 earnings forecasts for the firm from $0.57 per share one year ago to $0.43 per share today. This has left the group’s forecast dividend of $0.57 uncovered by earnings, but offering a prospective yield of 6.6%.
A recovery buy?
In my view, Inmarsat is a market-leading business that’s deeply embedded in several key markets. It’s also still a very profitable business, with an operating margin of about 30%.
Earnings are expected to rise by 19% in 2018. I’m confident this business will recover and remain successful. So buying today could be a contrarian opportunity.
However, the group’s $2bn debt burden and uncovered dividend look uncomfortable to me. I don’t think the shares are cheap enough yet to reflect the pressure on the firm’s balance sheet and the risk of a dividend cut.
