The dust is still settling after a small majority of the British voted to leave the European Union. Uncertainty is the word of the day, with contradictory reports about the likelihood of Britain’s economy reentering recession, and which sectors are likely to be hardest hit as a result of the decision.
While there are already clear losers – the commercial property market is taking a hammering – the effect on Britain’s publishing companies long-term is still unclear. In the immediate aftermath of the vote many publishers’ share prices fell sharply, in what was almost certainly a knee-jerk reaction. Since then, however, a number of publishers have seen their share prices return to pre-referendum levels.
— Jim Edwards (@Jim_Edwards) August 1, 2016
So what explains that short-term decline and recovery, and which are the media companies most likely to ride out the destabilising effects of Brexit and shocks like it?
Alex DeGroote is a media analyst at Peel Hunt. He argues that, while not many people really expected the Brexit vote to go the way it did, it was probable that media companies wholly exposed to sterling would be hardest hit:
“We said that if Brexit did happen then domestic stocks would get hit the most…anything that doesn’t have any diversification to benefit from. The flipside to that is that companies with overseas earnings, i.e. companies with big exposure to the US, which tend to be B2B companies rather than B2C companies, that they would actually benefit.
“Informa, Ascential, RELX… anything that had a lot of earnings and assets outside of the UK that would benefit from weak sterling.”
Of the companies in the UK, he cites ITV as an example of a company that initially took a hit due to its domestic focus, but which subsequently regained much – but not all – of its value.
The same was true for other domestically-focused broadcasters:
No Brexit blues for Del Boy, Rodney and Dave (the TV channel): https://t.co/j4Cx2MiyKG
— William Turvill (@wturvill) August 1, 2016
DeGroote believes that return to form was a result of many factors, not least a knee-jerk reaction to Brexit and a burgeoning understanding that media companies’ underlying strengths and weaknesses weren’t necessarily affected in the short-term. Additionally, he argues that internationally focused B2B companies will benefit in the medium-term:
“Underlying things are the same, but on a reported basis, you’ll benefit from your overseas earnings. That’s only a one-off impact… this year or next.
“If you’re a US buyer or acquirer, then actually sterling is quite an attractive asset to go shopping in.”
So what of the media companies whose underlying businesses aren’t necessarily sound?
Well, those publishers who are overdependent on advertising revenue seem set to tighten their belts. Since the referendum, we’ve seen a number of publishers releasing annual or quarterly reports which would seem to indicate that Brexit has had a cooling effect on their forecasts. From Campaign:
“On an underlying basis, revenue at DMG Media fell 2% in Q3 compared to the same period last year. Advertising revenue fell by 4% on an underlying basis, which was less than the 8% ad revenue fall the media division experienced in this year’s previous quarter.
“Despite digital ad revenue increasing by 12%, print ad revenue fell by 10% year on year.”
And there have been still more indications that digital advertising growth might start slowing for publishers in the near future.
— Jason Kint (@jason_kint) August 1, 2016
While the overall digital adspend is set to increase, according to today’s latest ad-spending forecast from the Advertising Association and Warc, the amount going to newsbrands is also set to fall:
“Overall forecasts have been revised down slightly since April (-1.3pp for 2016 and -1.7pp for 2017), driven by downgrades for newsbrands and direct mail, the UK’s third and fourth largest media channels.”
Trinity Mirror has seen its profits rise 40 percent in its latet results despite its heavy reliance on advertising revenue, though we won’t emulate the Daily Express and illogically claim this is somehow proof of Britain’s strength post-Brexit.
So of the B2C companies who are likely to be affected by Brexit, who’s likely to be worst off? DeGroote thinks there’s one potentially huge loser. Fresh off the back of an excoriating article from Jim Chisholm, it’s more bad news for Johnston Press:
“It’s proving to be a successful parent for the i, but it was irresponsible to spend that money on the i given where their priorities are. Because digital hasn’t really worked for them as they hoped, all of a sudden the narrative is really all about the i. I’m afraid they will be a loser from Brexit because they won’t be able to refinance their debt.”
In a way, then, Brexit acted as an accelerating factor when it came to appraising media companies’ long-term viability that also managed to boost the profile of geographically-diversified publishers. It’s still too early to say what will happen in the long-term, but Brexit has demonstrated more diversified publishers are those best able to weather economic shocks.