The Financial Performance of Independent News and Media PLC - Case Study Example

Independent News and Media PLC of the of the Table of Contents Executive summary 3 Characteristics, Growth and Competition in the industry 5 Global presence 7 Overview of the study 8 Economic Value Added 8 Calculation of NOPAT 10 Calculation for WACC 11 Agency problem 12 Dealing with the problem 13 Capital structure decision 13 Executive remuneration system 14 Valuation of the company 15 Share price movement 15 Conclusion 16 Executive summary The coursework throws light on the performance of the media company Independent News and Media Plc. It is the leading newspaper and media company and has its main stream of work includes publishing and printing the national, metropolitan, regional and provincial newspapers in the Island of Ireland, New Zealand and South Africa. The coursework elaborates the economic value added model with respect to the company. The economic value added model includes the calculation of NOPAT and WACC which has been evaluated for the company. The calculation of NOPAT is done taking the past 5 years data. The valuation of the company is also done in order to get its share price movement. The share price movement reflects that the company has been not performing well since 2010. The share price has drastically gone down because of eh decrease in profit and revenue of the company. The coursework also elaborates the agency problem that is faced by the company and also highlights how they are mitigating it. The capital structure of the company is also described which reflects that the company finance its capital through equity and debt. The executive remuneration plan is also highlighted which reflects the different short term and long term incentives that are enjoyed by the executives. Introduction Independent news and media plc (INM), headquartered in Dublin, Ireland, is a leading newspaper and media company whose primary line of activities includes printing and publishing national, metropolitan, regional and provincial newspapers in the Island of Ireland, New Zealand, South Africa and Australia (Yahoo finance, 2013). However, the company’s main interest lies in the island of Ireland. The company has significant shareholding in APN news and media which is an Australasian publicly listed company. INM has market-leading newspaper positions in Ireland as well as in Northern Ireland thereby establishing a very strong and rapidly growing digital presence that includes market leading digital positions in each of their main primary markets with more than 35 classified, editorial as well as transactional sites. Alongside having a shareholding in APN news and media, the company also has a shareholding in the daily free newspaper ‘Metro Herald’ as well as the national daily tabloid title ‘The Irish Daily Star’. INM is by far the biggest wholesale newspaper distributor and newspaper contract printer on the Island of Ireland. As far as its operations in Australasia are concerned, as mentioned above, INM has a 29% investment in APN News & Media Limited which is listed in the Australian Securities exchange (ASX). APN is the leading regional newspaper publisher in Australia and the largest newspaper publisher in New Zealand. The company is also the largest radio operator (50% owned that includes over 140 radio stations and also owns 50% of Australia’s largest outdoor advertising operators. APN also enjoys leading outdoor advertising position in Hong Kong. INM realizes significant value from its stake in APN news and media. In an aggregate, INM’s gross assets are worth around €322 million. The company’s aggregate revenue is €350 million and it employs close to 1000 people worldwide (Independent news and media, 2013). Characteristics, Growth and Competition in the industry Independent news and media plc belongs to the media industry. This is in complete alignment with the line of activities it is involved in. The line of activities involved in this industry is television, radio broadcasting, printing and publishing (newspapers, magazines, and books), music and films. These activities have their own unique characteristics, nuances and distinct models that companies tend to implement. Of the line of activities mentioned above, Independent news and media is mainly involved in newspaper printing, publishing and distributing and is also involved in radio broadcasting. Companies belonging in this industry operate either in a monopoly environment where the products and services in a particular region are controlled by one company or in an oligopoly environment where the control of products and services are in the hands of few companies. Oligopoly occurs mainly in the publishing industry and finally there is the monopolistic environment where multiple companies offer the same services and products competing with each other in terms of price and quality. Independent news and media mainly operates in oligopolistic environment with few key competitors. Over the last few decades a gradual increase in the conglomeration of media ownership is being witnessed that is allowing companies to realize economies of scale that previously was tough to achieve. Such has been the case of Independent news and media. The economies of mass media industry have become an issue of macroeconomic proportion. Companies employ diverse strategies in order to raise revenues for the services that they provide. Two sources of revenue stream that plays a crucial role in ensuring the financial stability of a media company are consumers and advertising. Such is the case of Independent News and media who always catered to achieve a larger customer base by expanding their line of operations as well as expanding their business into other countries. In practice, companies belonging to this industry combine these two factors in order to have a flexible stream of income. Print media falls into three major categories: newspapers, books and magazines. Independent news and media’s major business operation is newspaper printing, publishing and distribution. The newspaper printing industry is more inclined towards operating in local monopolies and oligopolies. This is particularly there are few local news sources. The section of classified advertisement makes up a substantial revenue generating source. Such is also the case of Independent news and media. The company entails a mix of first copy costs and relatively lower marginal costs. The cost of newsprint and distributions is normally low whereas the company has to bear relatively high editorial and journalistic costs. It sometimes becomes very difficult for a company to set a price of a newspaper in the long run. This is particularly because price of newspaper print goes through cyclical ups and downs. The highest that Independent news and media has to incur as far as their business activity is concerned is the editorial and administrative overheads. The company has been able to combine many of its back office activities such as administration and finance particularly because it owns more than one newspaper. Alongside printing and publishing newspapers the company also operates in the radio broadcasting sector through its shareholding in the Australasian company APN News & Media Limited. With the expansion of cable communication, radio has also become extremely consolidated. This sector is also very competitive with many new radio broadcasters trying to beat the market completion and gain competitive advantage. Independent news and media also implements a similar strategy. Its 29% shareholding in ANP gives it an access to 140 radio stations and other major outdoor advertising operators in Australia who can be used in order to effectively market the products and services offered by the company. The primary characteristics of the newspaper industry are that caters to serve a larger customer base and is associated with nationwide distribution. Gaining an exposure in this particular field is relatively tough as different customers have different perspectives and tastes and thus satisfying each and every one of them is a steep challenge that lies in front of the newspaper printing and publishing companies. Even though gaining exposure is difficult in this sector, the potential for growth is significant. The major characteristics of radio broadcasting are that the information sharing is only through audio and the information is specialized for a region. This is the reason why gaining exposure in this sector is relatively easy and like the newspaper industry this sector is also associated with tremendous growth prospects. There is no doubt about the level of competition that exists in this particular industry. As far as the competition that Independent news and media faces, the key competitors of the company are Johnston Press PLC, Mecom Group PLC, St Ives PLC STV Group PLC Trinity Mirror PLC (Bloomberg buinessweek, 2013). The companies operate in a mostly oligopolistic environment. A healthy competition ensures that quality products and services are being provided their customers. Global presence Independent news and media plc has a significant global presence. Its operations spans over Ireland, United Kingdom, South Africa, Australia and New Zealand. Independent news and media owns numerous national newspapers in Ireland as well as 14 regional titles, magazines and free newspapers. As a source of information, the company also operates through a substantial central website called the independent.ie that includes both national and regional contents. The company also operates a job portal and a property website. As far as the company’s line of business in UK is concerned it published the independent until the year 2010. The company also owns the Belfast telegraph group that publishes Sunday life and Belfat telegraph. In addition to that Independent news and media also publishes the most famous job magazine in the London area. The company was the second largest newspaper publisher in South Africa up until 2013 when it decided to sell its South Africa operations. Initially this was a mere speculation but later on the news was confirmed. Independent news and media has a significant presence in Australia and New Zealand where it is a 30% shareholder of APN news and media limited which is a large newspaper publisher based in Australia and New Zealand. The company intended to take APN News & Media Ltd private in May 2007 however, the deal was not successful. Overview of the study The following section will involve an in depth analysis of whether the company has been able to maximize the value of the shareholders over the last 5 to 10 years. In order to explain this, the model of economic value added (EVA) will be applied. Thereafter the NOPAT of the company will be calculated which will give a comprehensive picture about whether the company has been able to add value. Following that discussion will be made regarding how the company has dealt with agency problems and how they have handled decisions which were associated with the capital structure of the company. Analysis will also be done regarding the company’s ongoing investments and large scale transactions. In order to carry out this analysis the financial reports for the last 5 years will be rigorously studied. The current share price movement of the company is compared with that of the competitors. Finally a conclusion will be provided which will relate all the factors discussed within the study in order to investigate whether the company has been able to maximize the value of the shareholder or not. Economic Value Added Economic Value Added (EVA) is basically a trademark of Stern Stewart Consulting organist ion. The procedure has been adopted by a number of companies. It is used to measure the economic value of the company as well as its managerial performance. It estimates the firm’s economic profit in three ways which are as follows: It integrates the asset management and operating efficiency in one measure which are easily understandable by the operating personnel. It is charged for the capital at the rate which compensates the investors for providing capital for its operation. It also helps in eradiating errors from the accounting results. EVA provides the scope for increasing the managerial accountability which results from its capability for measuring the required economic rate of return for all the investments. It allows the investors and the mangers to examine their business operation and examine whether the company has become more or less valuable. It provides with operational efficiency and adds value to the multiples that are needed for the valuation of the company. The study of many researchers have showed that the multiples of positive EVA are higher than that of the negative EVA which implies that the companies that have negative EVA have the values that are higher than what is expected by the market value multiples. It is also described as the measure for the financial performance of the company which is closer to than any other for capturing true economic profit of the organization. The performance measure is linked with creation of shareholder’s wealth over a period of time. It is the approximation of the amount which exceeds or falls short from the minimum required rate of return which the debt holders and the shareholders will be getting after investing in the securities that have much risk. The formula for EVA is as follows: EVA = Net operating profit after tax (NOPAT) - WACC x Book Value of Capital Employed (Skavon, 2009) In this section the Economic Value Added model is explained with respect to Independent news and media plc. Calculation of NOPAT In calculating the NOPAT of the company, the data are collected from the annual report of the same. The following elaborates the NOPAT of Independent News and Media Plc for the past 5 years (Independent News and Media Plc., 2013b: Independent News and Media Plc., 2013c : Independent News and Media Plc., 2013d : Bloomberg market, 2013) NOPAT Years 2012 (amounts in thousands) 2011 (amounts in thousands) 2010 (amounts in thousands) 2009 (amounts in thousands) 2008 (amounts in thousands) Particulars           Net earnings 245000 41000 54000 88000 15900 Interest 37000 35000 50000 75000 13200 Taxation 10000 23000 2000 8000 2000 EBIT 292000 99000 106000 171000 31100             NOPAT adjustments           Increase in deferred tax 1000 -19000 -10800 -11000 -10800 Goodwill amortization 17000 17000 17000 17000 17000 Total adjustments 18000 -2000 6200 6000 6200   274000 101000 99800 165000 24900 Tax Charge @ 22% 60280 22220 21956 36300 5478 NOPAT 213720 78780 77844 128700 19422 From the above table it is inferred that the NOPAT of the company have increased over the period of five years from 2008 to 2012. However, in 2010 and 2011 there has been a decrease in the operating profit from that of 2009. Again in 2012 the company has restored its operating profit efficiency and have achieved a high NOPAT. Calculation for WACC Weighted Average Cost of Capital can be calculated using the following formulae: WACC = Weight of Equity * Cost of equity + Weight of Debt * Cost of debt Here, the cost of equity and the cost of debt are assumed to be 10% and 55 respectively. The table below elaborates the weight of the source of finance: Total Weight Debt 376000 0.65 Equity 194000 0.35 Total 570000 Hence, WACC = 0.35 * 0.10 + 0.65 * 0.05 = 0.035 + 0.0325 = 0.06 = 6% Thus the Weighted cost of Capital is calculated to be 6%. Now, Calculation of the EVA of the company (2012): EVA = Net operating profit after tax (NOPAT) - WACC x Book Value of Capital Employed = £ 213720 – 0.06 * £ 570000 = £ 179520. Thus the EVA of Independent News and Media PLC is £ 179520. Agency problem The agency problem refers to the clash of interest that exists between the management of the company and the stockholders. The managers who are acting as agent of the shareholders are supposed to take decision that will be related to the maximization of the wealth of shareholders. Thus the managers are motivated for acting in accordance with the shareholder’s interest. The agency problems that are faced by the company are the following: 1) Managers Vs Stockholders: When the manager of the company owned less than 100% common stock, there is a clash between the interest of the stockholders and the mangers. The managers at that time takes decision which are create a conflict of interest between the two. The manager of the company has taken the decision of acquisition but the according to the stockholder’s their benefit lies in takeover. 2) Creditors Vs Stockholders: The creditors of the company had given loan to the companies who are based on riskiness of company and also its capital structure. All the factors will be affecting the cash flow of company which is its potential cash flow and the main concern of the creditors. The stockholders have the control on such decisions. The stockholders take their decisions based on their interest thus there lays a probable potential problem that exists between the creditors and the stockholders. The managers of the company borrows fund for repurchasing the shares. It lowers the share base of the corporation and thus increases the return of the shareholders. The stockholders are thus benefitted from the returns thus obtained from increased share base. The creditors are only concerned with the increase in the debt that will affect the cash flow of the future. Dealing with the problem Independent New and Media has been facing the problems accurately. They are motivating the managers to act in favour of the stockholder’s interest. Managerial compensation is provided to the managers for retaining the competent managers. They are also provided with annual salary along with the bonus, company shares. The shares that are distributed to them are the performance shares and the executive stock options. The majority stock of any company is owned by efficient institutional stockholders who can influence the operation of the company and the managers. The stockholders have the right to fire the current management of the company when they are not satisfied with them. The stockholders approach the Board of Directors and encourage them to change the management, who are efficient enough to take care of the interest of the stockholders. Thus the company allows the stockholders to take tat decision on behalf of them. Capital structure decision The capital structure of the company refers to the structure of its liabilities.th company finance its assets through the combination of debt, equity or the hybrid securities. Independent News and media Plc has raised their funds through the combination of debt and the equity. The debt and the equity combination for the year 2012 are as follows: Total Debt 376000 Equity 194000 Total 570000 Executive remuneration system The Remuneration Committee consists of three non-executive directors who are responsible for holding meeting once a year and discuss regarding the responsibilities of the company towards its shareholders and also construct the remuneration policy for the executives and the employees (Independent News and Media Plc., 2013a) Short term incentive plan The salaries of executive directors are reassessed annually. The incentive compensation annually is tied to the performance of the individuals. The following table consists of the financial achievements of the short term incentive plans: Financial achievements Percentage of base salary payable Attainment of target operating profit 50% of the base salary payable At least equal to + 2.5% over the target operating profit Additional 10% of the base salary payable At least equal to + 5.0% over the target operating profit Additional 15% of the base salary payable At least equal to + 7.5 % over the target operating profit Additional 20 % of the base salary payable At least equal to + 10.0 % over the target operating profit Additional 25 % of the base salary payable (Source: Independent News and Media Plc., 2013e) Long term incentive plan The following table describes the long term incentive plan for the employees: Compounded Annual earnings per share First Tier: 3 years Compounded Annual earnings per share Second tier: 5 years Amount Vesting Less than CPI + 5.0% per annum Less than CPI + 7.5% per annum 0% vesting between CPI + 5.0% per annum and CPI + 7.5% per annum Less than CPI + 7.5% per annum and CPI + 10.0% per annum 50% to 100% vesting (pro rata) (Source: Independent News and Media Plc., 2013e) Valuation of the company This section comprises the evaluation of the share prices of the company at which the investors are selling or buying the shares. Independent News and Media Plc are listed on Irish Stock exchange and London Stock Exchange. The investors are very much interested in the shares of the company after examining their movement in price over the years (Yahoo! Inc., 2013b). Share price movement The share price movement of the company for the past three years are depicted in the following figure (Yahoo! Inc., 2013a): Figure 1: Share price Movement 2010 - 2013 (Source: Author’s creation) In the above figure the share price movement is prominently visible as the fall in the price is tremendous. The price of the share after April 2010 has fallen to a remarkable extent. The reason behind the drop of the share price is due to the fall in profit and revenue of the company. Thus it can be inferred that the company has not been performing well after 2010. The valuation of the company has gone down with the price of the share. Thus the company is not adding any value to the investors after 2010 as the share price has fallen drastically. Conclusion Thus it can be concluded that the company is not performing well with respect to the valuation of the stock. The share price indicates that there is a drastic fall after 2010 due to the fall in revenue and profit of the company. However, it is observed that the NOPAT of the company has increase over the years. References Bloomberg Businessweek. (2013). Independent news & media plc. Retrieved from http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=INM:ID Bloomberg market (2013). Independent news and media plc. Retrieved from http://www.bloomberg.com/quote/INM:ID Independent News and Media Plc. (2013a). Investor Relation. Retrieved from http://www.inmplc.com/investor-relations/share-information?page=share-price-chart&returnPeriod=1Y&period=3Y&fromDay=01&fromMonth=01&fromYear=2010&toDay=31&toMonth=12&toYear=2013 Independent News and Media Plc. (2013b). Annual Report 2008. Retrieved from http://www.rns-pdf.londonstockexchange.com/rns/4761R_1-2009-4-30.pdf Independent News and Media Plc. (2013c). Annual Report 2009. Retrieved from http://www.inmplc.com/reports/uploads/INM_Annual_Report_2009.pdf Independent News and Media Plc. (2013d). Annual Report 2007. Retrieved from http://www.inmplc.com/reports/uploads/INM_Annual_Report_07_-_FINAL.pdf Independent News and Media Plc. (2013e). Annual Report 2011. Retrieved from http://www.inmplc.com/reports/uploads/INM_Annual_Report_2011.pdf Independent news and media. (2013). About INM. Retrieved from http://www.inmplc.com/about-inm/profile/ Skavon, J. (2009). Economic Value Added. Retrieved from http://k126.fsv.cvut.cz/predmety/126fim/fim_fim_eva.pdf Yahoo finance. (2013). Independent News & Media plc (INM.L). Retrieved from http://finance.yahoo.com/q/pr?s=INM.L Yahoo! Inc. (2013a). Historical Prices. Retrieved from http://finance.yahoo.com/q/hp?s=INM.L+Historical+Prices Yahoo! Inc. (2013b). Summary. Retrieved from http://finance.yahoo.com/q?s=INM.L Read More