Newsquest Media Group Limited and Westminster Press Limited: A report on the proposed transfer to Newsquest Media Group Limited of the newspapers of Westminster Press Limited

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In our terms of reference, dated 14 August 1996 (see Appendix 1.1), we were asked by the Secretary of State for Trade and Industry to investigate and report on whether the proposed transfer to Newsquest Media Group Limited (Newsquest) of the newspapers published by Westminster Press Limited (Westminster)-listed in Appendix 1.1-may be expected to operate against the public interest.

Westminster publishes 80 local newspapers: two morning dailies, seven evening dailies, 24 weekly paid-for titles and 47 weekly free titles. It operates through ten divisions based respectively in Basildon, Bath, Bradford, Brighton, Darlington, High Wycombe, Kendal, Oxford, Swindon and York.

Westminster is owned by Pearson plc (Pearson), a diversified international group with interests in information, education and entertainment. As part of its business strategy Pearson decided to sell Westminster and in June 1996 invited offers for the business. On 5 August 1996 it agreed to sell Westminster to Newsquest for £305 million.

Newsquest was formerly owned by Reed Elsevier plc but in January 1996 it was acquired by an investment vehicle of Kohlberg Kravis Roberts & Co LP (KKR), a US merchant bank specializing in management buyouts, in conjunction with Newsquest's management. Newsquest publishes 113 newspapers through four publishing divisions: London/Essex, the south Midlands, Cheshire/Merseyside and Lancashire. Newsquest has no interests other than regional and local newspapers and sees Westminster as offering strong growth potential as part of a focused newspaper group. If the acquisition of Westminster proceeds it is envisaged that Cinven Ltd (Cinven), a UK fund management company, will contribute part of the equity capital for the acquisition in return for a substantial minority stake in the enlarged Newsquest.

Newsquest is currently the fifth-largest publisher of regional and local newspapers in the UK and Westminster the eighth-largest. The combined group would be the third-largest such group with 11 per cent of the total. The transfer would increase the overall level of concentration of ownership in that the share of the market held by the five biggest publishers would rise from 43.4 to 48.6 per cent. We are satisfied that these effects on the degree of national concentration would not operate against the public interest.

There are three geographical areas where the areas of operation of the two groups adjoin and, to a small extent, overlap. The most significant case is that of Essex, where Newsquest's share of the total circulation and distribution of regional and local newspapers would double from 27 to 54 per cent. There is, however, virtually no competition between the newspapers of the two groups, which cater for separate local markets, and other substantial publishing groups have a presence in the county. We do not consider that the degree of regional concentration in Essex, still less in the other two areas concerned (central England and Lancashire), would harm the public interest. The four instances where the circulation and distribution areas of the two groups' titles overlap, all involving small or very small areas, are not material given that other publishers also have titles circulating there.

Newsquest told us that if the transfer proceeded it would initially give more central guidance to the editors of Westminster's titles than was its normal practice, with the aim of strengthening the commitment to local news. We received no evidence, however, which cast doubt on Newsquest's commitment to accurate reporting and editorial freedom. Newsquest emphasized that it had no plans to merge or close any titles as a result of the transaction, and there are grounds for expecting the change of ownership to benefit Westminster's titles. We do not believe the proposed transfer would threaten the accurate presentation of news and free expression of opinion. Nor do we consider that the consequences of the transfer for efficiency and employment would be against the public interest.

We gave close attention to financial issues because of the capital structure envisaged for the enlarged group, which would have a debt equity ratio of around 2.2 to 1. Newsquest's projections show interest cover initially of only 1.5 times and cash flow after depreciation[Details omitted. See note on page iv.]

Newsquest argued that the projections were conservative and emphasized that its management and financial backers were committed to investing substantial sums on the basis of them. In the hypothetical situation of a cash flow shortfall there were measures which Newsquest could take to conserve cash without harming the long-term health of the business. If the shortfall was more severe Newsquest would work with its equity backers to refinance the company. KKR and Cinven confirmed this and said that they had ample funds available to them with which they could inject additional equity into Newsquest if that was the sensible course.

We attach importance to the commitments made by Newsquest and its backers. They are investing in order to build up the longer-term value of the company and would want to avoid actions damaging to the long-term health of the business. Given that substantial resources for equity investment are available to KKR and Cinven there are no grounds for thinking that Newsquest would be forced into making damaging cuts by its creditors. We believe that competitive pressures would prevent Newsquest from unduly raising advertising rates, and that the price sensitivity of sales of paid-for newspapers would deter it from solving any cash shortfall by increasing cover prices faster than the rate of inflation. Nor does it appear to us likely that substantial disposals would be made in order to raise cash. Even if there were disposals there is no reason to expect significant closures of titles, since Newsquest would want to sell them as a going concern. Any issue of concentration resulting from disposals could be addressed under the provisions of the Fair Trading Act 1973 (the Act). We do not therefore consider that the proposed financial structure will be harmful to the public interest.

For the reasons set out in paragraphs 1.5 to 1.10 we conclude that the proposed transfer may be expected not to operate against the public interest.

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