Market dislike of Axel Springer is over the top

The German media group spooked shareholders with news that the restructuring of its print unit and further digital investments will eat into 2013 profit. The fears look overdone. Springer is coping with the digital transition much better than most of its peers.

Axel Springer, Europe’s largest newspaper group, spooked markets on Wednesday (6 March). It expects earnings before interest, tax and depreciation to decrease by up to 9 percent this year. Analysts polled by Reuters were expecting an increase in profitability. Subsequently, Axel Springer’s shares went down by more than 6 percent. Given the company’s solid fundamentals and a successful transition into digital businesses, the reaction smacks of myopia.

The owner of Germany’s tabloid “Bild” and national daily “Die Welt” is coping well with the structural challenges to the media business model. In terms of revenue, its fast-growing digital operations have already become Axel Springer’s most important segment. In 2012, it surpassed the unit comprising German newspapers for the first time. Digital businesses generated 35 percent of total revenue compared to merely 8 percent five years ago. Besides, only about one-third of its digital sales and profit are generated by classic journalistic ventures like news portals. The bulk comes from digital marketing and online sites based around classified advertising.

Acquisitions have helped. But Springer avoided costly blunders such as News Corp’s ill-fated acquisition of MySpace. In an industry famous for burning millions, Springer’s deals are bearing fruit. In 2012, digital EBITDA jumped by 53.6 percent to 242.9 million euros. It contributes 38 percent of Springer’s total EBITDA.

It is a different story at Springer’s traditional print businesses. Declining print advertisement revenue led to a 9 percent drop in profitability of Springer’s German newspapers and magazines. But with EBITDA margins of about 22 percent, print still is making decent money. Springer is also better positioned than peers to realise economies of scale on the cost side. After successfully pooling the editorial staff of its national paper “Die Welt”, its Sunday paper “Welt am Sonntag” and its Berlin daily “Berliner Morgenpost”, it is now integrating its Hamburg daily “Hamburger Abendblatt” into a joint newsroom. This gives rise to short-term restructuring costs – which partly explain the surprisingly gloomy outlook statement from Springer on March 6. But it generates significant cost savings in the long term.

Springer will expand further into digital businesses in 2013. Restructuring of the print units will also continue. Investors should appreciate that rather than take fright.

This article was initially  published as a Reuters Breakingviews comment on 6 March 2013.

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