Financial Times

Tuesday May 25 2004

Media investors raise the alarm

Recent interventions by newly assertive institutional stakeholders raise fears that editorial independance is under threat, writes Tim Burt.

Last night, 20th Century Fox held a private screening of The Day After Tomorrow, a film depictingthe “strom that changed the planet”. In short order the world’s media capitals were engulfed: a tornado ripped through Los Angeles, hail devasted Tokyo and London was buried in the snow.
For investors in the audience, the abrupt change of climate was a somewhat extreme dramatisation of the mood sweeping industry.over the past 12 months media companies have faced a storm of unprecedented discontent from institutional investors.
Sly Bailey, chief executive of UK newspaper puplisher Trinity Mirror, this month became the latest media boss to receive a testy shareholder call.The investor – one of several to contact the company – wanted assurances that the furore over the Daily Mirror’s faked pictures of Iraqi prisoner abuse would not hurt advertising or profits. Within 24 hours Piers Morgan, the Mirror’s editor was sacked.
The intervention fits a pattern of mounting investor concerns. It coincided with a legal action in France by Appac, an association of small shareholders, over alleged insider dealing at Vivendi Universal, the communications and media group. In the US shareholders at Walt Disney have prompted Michael Eisner, the veteran chief executive, to resign his chairman’s role.
Disaffected investors also triggered the series of events that heve un ravelled Conrad Blake’s once tight hold over Hollinger International, the owner of the Telegraph Group. Institutional investors in the UK ousted Michael Green, chairman of commercial television company Carlton, ahead of its merger with rival Granada to form ITV plc, and also rattled their cages at BskyB over James Murdoch’s appointment at CEO.
The Trinity Mirror furore has been seized on as a new development because of suggestions that shareholders were getting involved in an editorial issue. This is a sensitive area, because global consolidation and the rise of large media conglomerates have prompted concerns that commercial pressures are influencing TV stations and newspapers to avoid controversial (and costly) areas that might be seen as pushing an anti-big-business agenda. The issue is particularly acute at Trinity Mirror because one of its investors – Tweedy, Browne (see box) – criticised the paper anti-war stance long before the fake pictures saga.
Trinity Mirror executive insist shareholders did not force Mr Morgan out. One insider says: “Nobody said ‘something has to be done’ or ‘the business is being damaged’. They simply wanted to know what was going on.”
But there is an argument that, since editorial values are part of a company’s brand, shareholders are entitled to voice concerns on major editorial issues.After all, the logic goes, a retailer’s sharehoslers take a view, for purely business reasons, on wether it is tocking suitable products or delivering on the promises of its advertising.
Deutsche asset management, for example, says Trinity Mirror shareholders were right to act. “Shareholders from any business sector have the right to expect that business decisions should be taken on the basis of sound advice and research.Other companies are required to produce products that ‘do what it says on the box’. In the case of media companies, checks should be in place to ensure their product is based on the same expectation of truth and transparency.”
Large investors dny targeting the media, and fund managers say they assess the performance of media companies using the same criteria they apply to other sectors. Richard Talbut, chief investment officer at Isis Asset Management – one of the shareholders that contacted the Trinity Mirror – says: “I don’t think media companies have been singled out. I think all companies, on all issues, are becoming much more aware of reputational damage.”
Mike Bishop, head of equities at Morley Fund Management, agrees. But he warns that earnings volatility in the sector has focused attention on management performance. “Media conceptually has been a growth area, but overall there’s been quite a lot of disappointment,” he says. “ The advertising recession has demanded different skills; at ITV, Charles Allen is back to cost-cutting which is what he does best.”
The upheavals at ITV and Trinity Mirror expose a schism between liquidly trated media stocks and tightly-controlled companies.
Rupert Murdoch is a big advocate of controlling shareholders. The media mogul says: “ To have very strong influence in the company and to bring stability to the company is a good thing. You look at other media companies without this protection and they’ve been gobbled up. Everybody bigger has tried to kill them.
“But to have strong family ownership is the norm in America, wether you look at the New York Times Company, the Washington Post or Viacom. They all have super-voting stock or controlling shares, although their ownership is way under 50 per cent like ours.”
John Malone, the controlling shareholder of Liberty Media, endorses that view. He says family control – or “Darwinism in the American media industry” – protects long term investment.
Acknowledging shareholder pressures, he says: “I can understand investors who want more transparency. But in many ways it’s not the pension funds themselves who are driving this, but those people who are running the money on short-term relative performance.Thoses guys would sell their mothers to make their Christmas bonuses.”
Hedge funds, in particular, have been blamed for much of the volatility in the industry. Companies exposed to such funds say they exercise too much pressure for rapid change.
Steven Cohen, chief investment officer of Kellner Dileo Cohen, the $500m New York hedge fund that owns shares in Disney and Hollinger, rejects that criticism. “There is a growing trend among institutional shareholders to get a greater degree of accountability,” he says. “Blaming hedge funds is a facile point of view. If there are misdeeds at a compny, action will be taken unless shareholders are asleep at the wheel.”
Executives who do not own their companies must heed that warning. Managers who deliver adequate shareholders returns are safe. Those who fail, as Tweedy, Browne says Conrad Blake did, are vulnerable.
Mr Eisner at Disney says the challenge is simple: “If I was managing these funds, I would be looking to the performance of the company; 100 per cent of my time is spent addressing shareholder concerns by delivering improved performance.”

www.ft.com/creativebusiness

Box: Conrad Black’s nemesis ‘decided to act like owners instead of sheep’

Whenever the saga of Conrad Black’s downfall at Hollinger International is reported, one name tends to emerge formost from the ranks of the mogul’s critics – the investment fund Tweedy, Browne.
Yet Christopher Browne, managing director of the New York-based firm which had total investments at March 31 valued at $5.3bn in its global value fund, insists that – contrary to popular assumptions – it has no tradition of agitating at companies it holds shares in.
“We decided to start acting like owners instead of sheep. We don’t have a reputation for shareholder activism – we have been, in my mind, in Hollinger,” Mr Browne says.
He insists that Hollinger corporate governance practices were not at the forefront of his mind when Tweedy took up the cudgels, publicly, at Hollinger last May. Instead, he says he was prompted by the underperformance of Hollinger publicly traded shares, then languishing about $11. Traders identified a ‘Conrad discount’ in the shares.
Mr Browne says: “If Hollinger was at $18 and we thought it should be at $20, we wouldn’t have bothered.[It was] primarily a commercial decision.”
Tweedy forced Hollinger International, the parent company of the Telegraph Group, the Chicago Sun-Times and the Jerusalem Post, to investigate payments to group executives, including Black. The subsequent revelations have prompted Lord Black to resign as chief executive of Hollinger International, be stripped of his chairmanship of the same group, and be named in a $1.25bn racketeering lawsuit. It also triggered the auction of the Telegraph Group. But investors have seen shares climb to about $20.
Tweedy, which has also invested in European publishers Axel Springer and the Dutch Telegraaf group, says commercial sense – not ideology or micro-management – drove it to clash with management at Trinity Mirror.
Mr Browne says that Thomas Shrager, who manages Tweedy’s stake in the tabloid publisher, was not welcomed by the company when he first raised questions about the anti-war stance espoused by Mirror editor Piers Morgan.
“They [Trinity management] said shareholders should stay out of it. I don’t necessarily believe in that point of view... Who says that an owner can’t tell what a newspaper should do?” he says, pointing to Rupert Murdoch’s influence over News International titles.
But Mr Browne says the company’s involvement in Trinity Mirror – including a call by Mr Shrager to Sly Bailey, Trinity’s chief executive, the day before Mr Morgan’s sacking – was business-related.
“The first time he did it [complained about the Mirror’s war coverage], his concern wasn’t so much editorial, but how the editorial slant of the paper might affect the business in turning off readers and advertisers – and that’s when it becomes a problem, especially in the UK,” he says.
Mr Browne says political beliefs do not play a role in the fund’s investment process: “[We have] no guidelines on investing in media based on editorial content.”
But he adds: “We probably wouldn’t invest in a pornographer.”