City View: A more positive sentiment in the ad sector since the turn of the year

In his first blog for Newsline, David Hellier, deputy editor at City AM, surveys the current financial backdrop and how it is affecting the media landscape from a city perspective…

The first few weeks of the year have been surprisingly benign for those who survey the financial landscape from the offices of City AM, right in the heart of what has recently felt a beleaguered City of London.

Of course, there have been shrill attacks on bankers’ bonuses, made against a background of anti-business rhetoric, but the markets themselves have started the year rather better than many expected.

Only days ago, we witnessed the Dow index in the US breaking through 13,000 for the first time since the start of the financial crisis and the FTSE in London has been trading at seven month highs, despite the concerns about whether the latest Greek bail-out will hold.

What this means for media groups is that some of those plans for strategic expansion can once again be dusted off the shelves and for dysfunctional boards or poorly performing managements there might be a case for feeling that bit more vulnerable.

To be fair, much of the merger activity so far this year has been in the resources sector, exemplified by the mega deal proposal, the £56 billion combination of Glencore and Xstrata.

But the higher level of deal activity has extended to advertising, where Aegis Group has outlined plans to buy the US digital agency Roundarch for up to $360 million. The willingness to do such a deal has no doubt been boosted by a more positive sentiment in the advertising sector since the turn of the year.

Says Ian Whittaker of Liberum Capital, who is positive about the Roundarch deal: “At the end of 2011 the advertising situation was seen by most to be concerning but this year so far it seems to be better than people thought it would be.”

Comments made by Aegis to support the acquisition about the advertising market in general has led Liberum, amongst others, to believe that their 2% organic revenue growth forecasts are too pessimistic.

Moving from the advertising sector to music, there is still a lot of work for Universal Music to do before it convinces the European competition authorities to allow it to buy EMI’s recorded music business and keep it in one piece, but at least there are encouraging signs of revenues increasing from digital sales of music, albeit from a low base. According to the latest figures, UK digital music revenues now account for more than a third of turnover, up from 27% in 2010. Persuading people to pay for music in digital form is all last becoming a reality even if the margins are so far very tight.

Complicating the Universal competition issue is news that Warner Music has not entirely given up hope of barging in on the deal, so expect the wrangling to take some time.

In television, buoyant advertising revenues are continuing to boost sentiment towards ITV, where the management team under Adam Crozier has largely been given a thumbs up in the City (the latest ITV results are due to be released tomorrow – Wednesday 29). Numis, ahead of financial results, said it believed “the new management team was delivering ahead of expectations, making good progress in improving the on screen, operational and financial performance”. There has even been a bit of bid speculation surrounding the group.

Where London clearly lags well behind the US in its media landscape is in being able to replicate digital companies of the size and importance of Facebook and Groupon, both of whom have joined the public markets.

As it happens, London’s IPO Market, on which new companies traditionally invite outside investors for the first time, is currently moribund. This has been a factor, presumably, in delaying a sale of Steve Morrison’s AllThreeMedia to new investors, but equally the talk is that possible trade buyers have been put off by the high price being demanded by the private equity owners. Markets might be better than we expected but this is still no time for being too grabby.

To end on another note of optimism, though, news that the Independent’s i newspaper is close to breaking through the 250,000 circulation barrier has got to be proof that the old-fashioned newspaper is still a popular product, as long as it is tailored in the right way for its audience. Coming as it does alongside the launch of the Sun on Sunday, it’s a sign that there’s still life in old media. Just.