First shots fired in the bidding for Independent Newspapers South Africa.Newspapers might be dying, but they still carry enough legacy to attract good money. Warren Buffett has changed his mind and started scooping up US papers. And this week in South Africa bidding began for Independent Newspapers, the willing cash cow that's kept on giving to its embattled Irish parent..Of course the first confirmed offer is supposed to be "under wraps". Supposedly to keep up staff morale and competitors guessing. But newspaper offices are leakier than yesterday's perforated front page. In corporate actions involving media companies, bankers and lawyers might as well toss away the "confidential" stamps..With the leaks also come oodles of conjecture. A known fact, though, is that Irish holding company Independent News & Media Plc (INM) has teetered on the brink for much of the past four years. A hubristic growth strategy fuelled by debt and helpful cash injections from its SA newspapers came to a sticky end in the 2008 financial meltdown. When the dust cleared, shareholders realised R9bn debt wasn't smart in a company whose core business was going backwards and home market crashing..A drawn-out boardroom coup eventually saw the O'Reillys ejected by major shareholder Denis O'Brien. Priority shifted from growth to survival; from debt accumulation to repayment. Assets everywhere were sold, some on the cheap like the bleeding London operations given away to a Russian oligarch for a pound. Done to rescue the original Irish titles by eliminating the debt noose..Although the asset offload has enabled INM to almost halve its net debt to R4.5bn, that's still an uncomfortable five and a half times operating profit. Chairman James Osborne reiterated in the latest annual report that "management's focus remains on debt paydown…" The elastic is still stretched near breaking point. So those with the most vested of interest, like veteran Indi SA financial journalist Ann Crotty who speaks for disgruntled staff, have for the past three years been trying to work their own solution..Crotty has talked her way into INM's Dublin executive suite and into conversations with pretty much any party that looked like a prospective bidder. Her message is clear: no matter who wins, staff are fed-up with cost cutting that long ago eliminated fat and has been slicing into muscle. She says the staff grouping has found funders willing to kick in enough to buy a 25% stake that will be held in a trust and used keep any new owner honest. Crotty says bidders should take this seriously. And also realise their purchase price is only the beginning of what's needed to rejuvenate the cash starved operation..Only time will tell whether Crotty is heard. But her talks included time with Iqbal Surve', the ambitious head of Sekunjalo whose consortium emerged this week as the front-runner. Surve' dropped off an underwritten bid at Independent House in Dublin believed to be worth R2.4bn. It's a sum that's enough to stabilise the Irish group by further halving its debt. Pretty tempting if you've spent the past four years fighting bankers, cutting costs and fretting (justifiably) about Irish economic prospects. INM has until the end of September to respond..The Surve' consortium's bid was initially dismissed by potential rivals as too rich and lacking substance. But they do so at their peril. That seriously under-estimates the networking skills of a man who started life as a medical doctor and first came into public prominence as Bafana Bafana's physician..Surve's connections have been turbo-boosted by his involvement with the World Economic Forum, specifically the inclusion of Sekunjalo into the 333 businesses invited into the WEF's Global Growth Companies community. That expands an already potent contact base. And brings credence to whispers that his consortium includes a Middle Eastern sovereign wealth fund; an independently wealthy North American billionaire; and a leading Silicon Valley New Media group. Although tight lipped, he did tell me JSE-listed Sekunjalo Ltd is not involved – the running is being made, rather, by the privately owned Sekunjalo Holdings. So there's no need, he added, to make anything public..As for the price, insiders reckon Surve' and Co wanted to launch a knock-out blow or, say sceptics, scare everyone else away. Even Crotty believes the R2.4bn proposed is rich. Maybe. Then again, if you run a line through Mvela's already tabled offer to minorities of the other in-play SA media company Avusa, maybe not..Last year Independent SA generated operating profit of just under R400m for its Irish parent. Despite – or perhaps because of – scant re-investment for many years now, the SA operation produces a juicy 19% operating profit margin on revenues of just over R2bn. So the bid of R2.4bn is roughly six times its albeit sliding operating profit. The R24 a share offer tabled by Mvela values Avusa at 11 times that group's latest annual operating profit of R273m. Avusa's operating profit margin, incidentally, is just 5%..Independent SA's buyer will acquire a mature collection of newspapers with daily sales of 400 000 copies and weeklies at around 350 000. Avusa has a similar sized Sunday newspaper, far smaller dailies and a mishmash of fast declining movie, book retailing and other assets. But after its R800m purchase of UHC, there's now a hefty printing component in the mix. Also, Avusa bid leader Andrew Bonamour reckons the media operations offer an ideal turnaround opportunity through cost cutting. By contrast, Independent SA's costs have been squeezed to a point where the bones are showing..Now that Surve' has set the bar, other potential bidders need to seriously consider whether they can risk a grab at this particular falling knife. The INM annual report deviates from local print media propaganda admitting "circulation trends overall in SA remained soft and continued to trend downwards with the overall market reflecting a further year-on-year decline of 6%." With the only consolation for INM shareholders that its SA circulation volumes were down 4,4%, so "slightly firmer than competitor titles.".And that's where the real question lies. At the current run rate, whoever buys Independent SA must wait at least a decade for the company to earn their money back. Prospects, though, are for further profit contractions. So the wait will surely be even longer. That's a far cry from the Irish who, Crotty estimates, have in the past 13 years reaped operating profits from SA worth a staggering R4.5bn, seven times INM's original investment..It seems that with newspaper companies, like thoroughbreds, you have to get up very early to put one over folks from the Emerald Isle. A fact which shareholders in the old Independent Newspapers SA group didn't factor into their calculations when accepting the Irish offer and subsequent delisting from the JSE back in 1999. What, with this one and more recently Absa and Vodacom, South Africans have a rather poor record when selling businesses to foreigners.
