I am once again going to break my resolution not to reminisce about BHS. Guardian Media Group might not appear to have much in common with Sir Philip Green. But there are some funny parallels between the liberal publisher’s efforts to sell The Observer and the now-disgraced retail tycoon’s attempt to dump the decrepit department store chain in 2015.
Green, desperate to distance himself from BHS’s inevitable collapse and the £500 million-plus hole in its pension funds, alighted on an unsuitable buyer. Dominic Chappell, a former racing driver, carted off BHS and its problems. It went bust little more than a year later. James Harding, the Times and BBC News veteran who co-founded Tortoise, is no Chappell. He is not a former bankrupt — although he does have a taste for the unaffordable. But Tortoise is a thinly capitalised vanity project in search of a commercial model. Buying The Observer will give it a reason to tap backers for millions more in funding and provide Harding with a national newspaper as a platform. It is fanciful, though, to think that a start-up that has bled £16 million since 2018 will be able to turn around a struggling newspaper whose revenues mostly come from physical sales and print advertising.
This is not another column joining the chorus of wailing over The Guardian’s decision to get rid of the 233-year-old title that opposed Sir Anthony Eden’s government over the Suez crisis. It makes sense for the group to consolidate its weekend output into a single product. The news media continues to polarise, the latest diverging of fortunes being the closure of 166-year-old Estates Gazette and the £25 million valuation ascribed to Green Street News — the young, digital-only commercial property publication where I write a guest column.
The Observer is on the wrong end of that polarisation. The cleanest option would be to close it and merge its teams into a new weekend Guardian — a plan explored but shelved by then editor Alan Rusbridger in 2009. But if The Guardian were genuinely able to jettison it, that would be the next best outcome.
“Genuinely” is the key word, though. The company failed to prepare the ground through the usual device — a strategic review — and there was no auction. Amid an entirely predictable staff backlash — and accusations that the Scott Trust, the £1.3 billion fund that owns the papers, is breaching its duties to Observer journalists — bosses have softened the terms of the deal. The trust now plans to inject £5 million into the combined Tortoise/Observer in return for a stake of less than 10 per cent.
This is a mistake, for two reasons. Media analyst Alex DeGroote points out that The Observer should be the senior partner in the merger because it will contribute more than two thirds of the revenues (it turns over about £16 million, to Tortoise’s £6 million). The Guardian is paying too much for a stake that isn’t big enough, inflating Tortoise’s valuation. And by taking equity in the project, The Guardian is entering Hotel California — or, to put it another way, getting its fingers trapped under Tortoise’s shell.
Just as Green found himself tangled up in BHS after thinking he’d sold it — and had to pay more than £350 million back into its pension funds — so the Scott Trust and its flagship brand will be unable to dissociate themselves as The Observer plods into trouble under its new ownership. It is inconceivable that Tortoise will not need another big cash call as the task of transforming The Observer into a digital subscription product turns out to be harder than anticipated. The whole point of this sale was to free Guardian Media Group from such headaches. Yet when the moment arrives, and the alternative is seeing The Observer fold, the Scott Trust may be forced to pump in more millions.
I imagine all this is the result of commercial naivety rather than any bad intent. It is surprising given that Guardian Media Group is chaired by Charles Gurassa, who has held senior positions at big companies including EasyJet. Insiders insist that the counterfactual — keeping full ownership of The Observer — would be worse.
Whatever: this folie à deux, or shared delusion, between its top brass and Tortoise provides a prime example of how not to do a transaction. After a lot of reputational pain, The Guardian looks set to end up where it started — still exposed to the woes of its Sunday sister title. There’s just less swearing than during Green’s sale of BHS.
Tension, tension, everywhere
Thursday is D-Day for the water industry — D standing for determination. Ofwat is due to hand down its final verdict on the returns privatised companies will be able to make over the next five-year period. After the regulator delivered a draft version in July, the utilities and their owners unleashed a torrent of lobbying, warning that the sector was in danger of becoming uninvestable.
Ofwat proposed a 3.7 per cent real return, which they say is far too low given where interest rates sit. It set out £88 billion of spending for upgrading sewers and curbing spills, whereas the companies want £108 billion. Ofwat envisaged customers’ bills rising by 21 per cent, or £19 a year; the industry is demanding 40 per cent, or £35.
Arguing on behalf of water companies is a bit like pleading that a serial killer is reformed. But it is in nobody’s interests that melodramas such as the tortuous restructuring of Thames Water trickle on indefinitely. A monomaniac regulatory focus on holding down bills in the past contributed to a dynamic where owners underinvested in infrastructure and squeezed assets for dividends. Ofwat should get to a sensible solution that staves off a tidal wave of appeals to the Competition and Markets Authority.
Money to reduce sewage spills can come from only two sources — investors, via straitened returns, and customers, via higher bills. Both constituencies are going to have to swallow some medicine.
[email protected]
