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Ex-Booker boss takes intriguing stake in Menzies Distribution

Charles Wilson’s 10 per cent stake in Menzies Distribution casts a new light on the unloved newspaper distribution sector
May 13, 2021
  • Newspaper distribution is a dwindling industry but corporate murmurings suggest there may still be life left 
  • Menzies Distribution which was spun out of John Menzies and is PE owned could be looking to merge with its last remaining rival - Smiths News
IC TIP: Hold

It is fair to say that the business of shifting newspapers around the country in vans, at a time when print readership has shrunk by two-thirds over the past 20 years, is never going to catch the imagination of investors. However, news that Booker’s successful ex-boss Charles Wilson has taken a 10 per cent stake in private equity-owned Menzies Distribution sets up an intriguing debate over whether there is still value in the “distribution” arena of newspaper distribution, along with some interesting speculation over the future of small cap Smiths News (SNWS).

Menzies itself was spun out of John Menzies, the aircraft services company, and sold to private equity firm Endless for £74.5m in 2018. It claims to be one of the fastest growing distribution companies in the UK, with sales reported at £1.1bn. Among its other interests, it has the contract to distribute the newspapers belonging to Reach (RCH) - including the Mirror, Express and Star - and, along with Smiths News, it forms a duopoly in the print distribution market - split roughly 45 per cent to 55 per cent, respectively.

Smiths News has endured a bumpy ride over the past few years after rebranding itself firstly as Connect in 2014, and then back again to Smiths News last year. The pandemic hit sales and profits hard, and the group had to negotiate a £120m refinancing package with its lenders in November – ripe, on the face of it, for a takeover.

Competition issues and supplier strife

Whether such a deal could realistically get off the ground would depend on the view of the Competition and Markets Authority (CMA).

The watchdog has so far been quiet on consolidation within the print wholesale sector. For instance, the CMA raised no objection to Smiths’ acquisition of Bertram’s, a book wholesaler in 2009, and its purchase of educational supplier Consortium in 2012. However, it is the relative failure of Smiths’ diversification strategy that is behind many of its difficulties, with the resulting dominant position in the print distribution market a magnet for regulatory action.  

Additionally, relations between publishers, retailers and the distributors cannot be described as harmonious. There are regular arguments over so-called carriage fees that cut into retail margins, while the pandemic has stoked fears among publishers that the collapse of a wholesaler could be on the cards.

According to reports, contingency planning for such an event got as far as the major newspaper groups looking to distribute their own papers in a “super-monopoly” scenario and asking for a special waiver from competition authorities to do so. In the event, both Smiths and Menzies pulled through, but it did serve to highlight the fact that alternatives to a duopoly are plausibly available.

For those with a stomach for risk, Smiths News does represent an interesting special situation. If nothing else, a business that has trucks and warehouses all over the country has some attraction in a time while distribution remains so important. Even if no takeover appears, the successful refinancing and an ability to generate free cash flow has left the sell recommendation behind. Hold at 43p.