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Commercial Awareness: The Fortnightly Round-Up (w/b 18th September)

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About The Author

Jack Turner (Commercial Awareness Guru)

Jack is a law graduate from the University of Manchester and is currently working for as an analyst for a 'Big 4' accountancy firm. He has an interest in current affairs, business and commercial law, while also being a talented and passionate musician.

This article is part of the 'Commercial Awareness Fortnightly Round-Up' series, edited by Jack Turner.

Every two weeks, Keep Calm Talk Law will bring you an overview of main commercial stories that have occurred. Detailing the main players involved, the interesting and salient facts, and the main points of discussion that arise from each story, this round-up is intended to be vital tool for developing that commercial knowledge and awareness demanded by the country’s top law firms.

Other articles from this series are listed at the end of this article.

Trinity Mirror in talks to buy Express Newspapers

Trinity Mirror, the parent company of the Daily and Sunday Mirror, has made an offer to acquire 100 per cent of the publishing assets owned by former pornographer and now billionaire, Richard Desmond. Through the holding company, Northern & Shell, and its subsidiary, Express Newspapers, Mr. Desmond owns titles including the Daily and Sunday Express, the Daily and Sunday Star and magazines including OK. The price tag for the assets has not yet been disclosed but it is anticipated to be set at around £135m.                                            

If completed, the deal would mark the biggest shake-up to the UK newspaper industry since Sir David and Sir Frederick Barclay bought the Daily Telegraph for £665m in 2004. Since then the newspaper industry has been hit by sharp falls in print advertising revenues and, with the likes of Google and Facebook occupying a majority of the digital advertising market, digital revenues are not growing at a fast enough rate to fill the gap. Similarly, with the introduction of online news outlets, readership for some print newspapers has been declining. Trinity Mirror reported around 380,000 copies being circulated in July 2017 – this figure was down 10 per cent on the previous year.

Despite the issues facing the print newspaper industry, Express Newspapers regularly returns healthy profits. The group turned a pre-tax profit of £30m from a turnover of £173m in 2015, although many critics attribute these profits to a ruthless cost cutting-strategy that favours margin over the quality of content. In acquiring Express Newspapers, Trinity Mirror will take over a group that is, at present, profitable.

For Mr. Desmond, the sale of Express Newspapers fits into his wider strategy to scale back his media empire and instead focus on his property investments and The Health Lottery, owned by Northern & Shell. In 2014, he sold Channel 5 to Viacom for £460m and last April, he sold a number of his adult entertainment channels for just under £1m. Mr. Desmond has been described as a media mogul that is more interested in the pursuit of profit than he is in using his media empire to advance his political interests – although he was a vocal supporter of UKIP and Brexit, a stance mirrored by his publications. As such, from a business perspective, the decision to exit the print newspaper industry is probably a prudent one given that market metrics do not look promising.

Trinity Mirror, on the other hand, has been attempting to act as a consolidator in the UK newspaper industry. In 2015 it acquired Local World for £187m, giving it a collection of local newspaper titles. In acquiring Express Newspapers, Trinity Mirror is hoping to cut costs by consolidating backroom operations, such as IT and sales, and benefit from Express Newspapers extensive printing capabilities. Similarly, the combined group will also have greater leverage with advertisers to attempt to claw back some of its declining advertising revenues.

However, short-term cost savings can only be part of the solution for Trinity Mirror. The reality is that the publications that both Trinity Mirror and Express Newspapers own are declining enterprises with an aging readership. Their sustainability relies on the publications adapting their business to reflect the changing ways that consumers are getting their news.

Talking Points

When there is a major consolidation within a market, as there is with this deal, the merger will often need to be approved by the Competition and Markets Authority (CMA), the UK’s competition watchdog. Mergers which substantially reduce competition in the market may be prohibited or have conditions imposed upon it – e.g. to diverge assets. Mergers within the media industry are particularly liable for competition scrutiny due to the need to protect media plurality. Media pluralism is the idea that citizens should have access to a range of sources, views, and opinions in the media and that no single player should have an overwhelming influence over content and material.

The media plurality concerns in this deal lie over how the traditional Labour party-supporting Mirror titles will coexist with the right-wing, UKIP and Brexit supporting Express newspapers. Séamus Dooley, acting general secretary of the National Union of Journalists, called for Trinity Mirror to give a clear statement concerning how the editorial independence of the titles will be maintained post-merger and what the implications will be for working practices and staff headcount.

Analysts will be looking to the competition regulators decision on the 21st Century Fox – Sky merger, as discussed in a previous edition of the Keep Calm Talk Law Fortnightly Round-Up, as an indication of whether the deal between Trinity Mirror and Mr. Desmond will be approved. If 21st Century Fox’s takeover of Sky receives regulatory clearance, it is highly likely that the vastly smaller and much less controversial Trinity Mirror takeover will also gain clearance. In a development in the 21st Century Fox – Sky merger this fortnight, the UK Culture Secretary has referred the deal to the CMA for further scrutiny and investigation.

Bell Pottinger’s UK Arm Enters Administration

Bell Pottinger was once a spearhead of London’s lucrative public relations market. Most public relations firms represent controversial clients; after all, those in the most need of improving their public image are those that are never too far from a scandal. However, Bell Pottinger always seemed to enjoy working for the murkiest of these clients. Counting Asma al-Assad (the wife of Syrian president Bashar al-Assad), Belarus’s dictator Alexander Lukashenko, and many repressive regimes and tyrannical governments as clients, Bell Pottinger had already consumed enough poison to make even the healthiest of companies queasy. In the end, it was an inflammatory campaign that it ran for the South African Gupta family that put the final dart in the firm’s back.

The Gupta family are a South African business family who has developed a reputation for using their close links to the South African president, Jacob Zuma, for financial gain. They were accused of using their influence to mastermind the replacement of fired former finance minister Pravin Gordhan to hire a candidate that would give the family greater access to lucrative public contracts. To deflect criticism away from the Gupta family, Bell Pottinger created and commissioned a campaign targeting wealthy white South African individuals and corporations to stir up anger about “white monopoly capital” and “economic apartheid” in the country. An independent report by Herbert Smith Freehills said that although Bell Pottinger had not come up with the terms “white monopoly capital” and “economic apartheid” as some had claimed, the use of such terms was potentially racially divisive in a country still dealing with the legacy of apartheid. By whipping up racial tensions on behalf of a client, Bell Pottinger was found to be in breach of ethical principles and had sparked public outrage.

Condemnation of Bell Pottinger came thick and fast following the scandal. The firm lost key clients in South Africa including luxury goods company Richemont and investment management company Investec. Elsewhere, Singapore investment company Temasek, telecoms company Talk Talk, and banking giant HSBC dropped the firm. Chime, the marketing and advertising business that once owned all of Bell Pottinger, wrote off its 25 per cent share in the firm for nothing. Key employees were next to exit. John Sunnucks, a senior account manager and contender to become the next chief executive, left the firm following the exit of former managing director of crisis and litigation Stuart Leach, and former partner Nick Lambert.

Clients, employees, and investors were all keen to distance themselves from this scandal. So too was the wider PR industry. To send a message to the business world that London’s PR market is not based on unscrupulous foundations and to reduce any backlash against the industry as a whole, the Public Relations and Communications Association terminated Bell Pottinger’s membership of the industry body for at least five years and strongly condemned its conduct.

The party was over, the lights had come on and all that was left was the battered shell of a firm still reeling from the wounds it had inflicted upon itself. BDO, a professional services firm, was instructed to advise on the sale of Bell Pottinger. It was fitting that the firm instructed BDO, better known for its insolvency services than its M&A capabilities, as a week later its remit changed; BDO had now been appointed as administrators for Bell Pottinger’s UK arm.

In order to realise value for creditors, BDO has made redundancies and are seeking an orderly transfer of clients to other entities. Bell Pottinger’s Asian and Middle Eastern arms are in the process of separating from the UK parent and rebranding to distance themselves from the scandal.    

Talking Points

There is a certain irony in a public relations firm being brought to its knees by a public relations scandal. While their job is to keep their clients out of the headlines they themselves have had their name dragged through the mud. But beyond the irony, there stand important lessons to be learnt from this scandal.

First, if businesses do not want their reputation tarnished - which presumably very few would - then they should not act in an unethical way or aid a company that acts in an unethical way. This seems like such a banality that it isn’t worth mentioning. However, time and again big businesses have their names plastered across the front pages because they have acted in a way that evokes public outrage. In most cases, this can be avoided by conducting adequate due diligence before taking on a client to identify any issues which could cause reputational damage to the firm. This is a practiced element of a law firm’s take on procedure for a client. If, like Bell Pottinger, a firm chooses to act in a way that it knows, or should know, is unethical then it must be expected to face the consequences. Sometimes management is aware that unethical practices are taking place, but short-term profitability outweighs the reputational risk in their eyes. However, the long-term damage that such practices can have on an organisation’s reputation can, as this story illustrates, lead to that organisation’s collapse. As Warren Buffett once wrote,

[W]e can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.

Second, if an organisation finds itself in a reputational crisis caused by its own actions then it should use Bell Pottinger as an example of how not to handle that crisis. At first, Bell Pottinger denied any wrong-doing in its work for the Gupta family, presumably not expecting the evidence against it to be as damming as it was. When an “unequivocal and absolute apology” was finally delivered it had lost its potency both because it was overdue and because it was only accompanied by the firing of a mid-level partner and lower-level employees. One of the individuals who arguably should have been fired months earlier, then CEO James Henderson, was actually the person delivering the speech. He and Lord Bell, co-founder of the firm, had been bickering over who was to blame for the scandal. This unwillingness to take responsibility amongst senior management added to the inadequacy of the firm’s response to the scandal. Henderson’s eventual resignation was diminished by the fact that it was becoming increasingly obvious that Bell Pottinger was a sinking ship; whether he resigned or not there would be no job for him at the firm in the future. Bell Pottinger should have confessed earlier, apologised, forced a prominent figure to resign and donated some of the fees it generated from the Gupta account to charitable causes in South Africa. Maybe if it had done this, Bell Pottinger would have been sent away with a few bruises which could have been healed with time.

Uber loses London Licence

Transport for London has declined to renew Uber’s licence to operate in the city after its expiry at the end of September. The transport regulator concluded that Uber London is not “fit and proper” to hold a private hire operator licence. The decision comes after the ride-hailing app was criticised by the Metropolitan Police for failing to properly handle serious allegations of rape and sexual assault of passengers by drivers.  It has also been blamed for congestion, failing to conduct proper security checks on drivers, and a rise in collisions.

Londoners spend more on transport as a proportion of GDP than people in New York, Tokyo, Singapore and Hong Kong. The UK’s taxi market is worth $11.5bn – more than France and Germany combined. Exclusion from London will be a huge blow to Uber, who claim that they employ 40,000 Uber drivers to serve the 3.5m Uber app users in the city.

Uber’s entrance into the UK market in 2012 brought growth in the country’s taxi and private hire industry to a standstill. Since then the market has remained untapped by other raid-hailing apps and Uber has been able to acquire a large market share. Taxify, a similar ride-hailing app, launched in London earlier this month, hopeful of taking market share from Uber by offering higher bonuses to drivers and promising to take a lower commission from each fare. However, it was quickly locked out of London after being banned for not holding an appropriate license to accept private hire bookings in the city.

Tom Elvidge, Uber’s general manager in London, confirmed that the company would be appealing the decision by Transport for London not to review its licence. He further noted that the decision would put 40,000 drivers out of work, would deprive Londoners of convenient and affordable means of transport, and shows that the city is closed to innovation. Uber has 21 days to appeal the decision and can continue to operate until the process has been completed.  

Talking Points

Uber made losses of $3.3 billion in 2016 on a turnover of $9 billion. Despite this, investors are still willing to pump money into the company. This is because Uber owns software that brings together passengers and drivers onto one integrated platform. Uber is the middleman in the transaction between passenger and drivers and for use of its platform it takes a commission of 20 to 25 per cent on each fare. Its business costs are low (it doesn’t own or maintain any of the vehicles used by its drivers) but it has the potential for high market share. This high market share will come from network effects; as Uber attracts more drivers, the ease of getting a taxi will attract more passengers. As the number of passenger’s increase, so will the number of drivers. This cycle continues until, in theory, Uber dominates the market. Investors’ money is the key to getting this cycle moving; Uber plans to use it to subsidise drivers until it can realise its full earning potential and sustain itself.

Being locked out of a market with 40,000 drivers and 3.5 million potential passengers causes significant problems to this business model as it relies on the growth of passengers and drivers to dominate. Investors are optimistic about Uber, and they are right to be; its potential is huge. But setbacks to the company such as this may cause optimism to waver. Uber cannot afford to lose too much of its investor’s money; at the moment, it is what is keeping the company afloat and allowing it to meet its obligations.   

Theresa May’s Florence Speech

Theresa May picked Florence, birthplace of the Renaissance, as the venue for her Brexit speech which attempted to revitalise negotiations. Creativity, compromise, and unity were key themes of the speech – a stark contrast to the hostile, unbending, uncoordinated dialogue between the UK and the EU so far. Below are some of the key takeaways from the speech:

  • Promise to protect the rights of EU nationals living in the UK. Theresa May said that the UK court system should be responsible for upholding their rights. EU law will be transferred into domestic law which the UK courts will interpret. Courts may take EU court judgements into account to aid in the interpretation and application of EU law. This approach differs from that put forward by the EU; they believe the ECJ should be responsible for upholding the rights of EU nationals living in the UK, not the UK court system.
  • New framework for economic partnership. Theresa May called for a “creative” new framework for economic partnership. She ruled out both the EEA model and the Canadian Free Trade Agreement Model as being unsuitable and unnecessary models for the UK’s future economic relationship with the EU post-Brexit. This approach also differs from that put forward by the EU. They have said that Britain must choose either the EEA model or the Canadian free trade model and that there will be no special agreement.
  • Dispute Resolution mechanism put in place to resolve disputes. Theresa May echoed the position put forward in previous Brexit policy papers, discussed in a previous edition of the Keep Calm Talk Law Fortnightly Round-Up, and maintained that this mechanism should be separate from the European and UK court systems.
  • New model for cooperation on security.
  • Implementation period of “around two years” to allow for extra negotiation time, time to implement new regimes and to provide greater certainty for businesses. Theresa May noted that the UK should hold the same access to the market that it currently has during the implementation period. She also called for a “double-lock” promise that the implementation period will happen but also that it has a time limit and will eventually end. This, she claimed, would provide certainty to business and presumably appease brexiteers who want an exit from the EU as soon as possible. The pound, which fell sharply when Theresa May began her speech, picked up a little during this section of the speech.
  • Britain will continue to make financial contributions to the EU budget during the implementation period and will honour commitments already made. In relation to the latter promise, Theresa May mentioned that until 2020 no other member state would have to pay more or receive less than currently arranged.

Eyes now turn to Brussels; they must decide whether or not these commitments are sufficient to begin the next round of talks. Given the obstinacy of the EU's negotiating team, it would be a surprise if they are.   

In Brief: Other Developments this Fortnight

  • Fox-Sky merger referred to CMA (Link)
  • European Commission unveils draft proposed regulation on foreign direct investments into the EU (Link)
  • Ryan Air embroiled in flight cancellations complications (Link)
  • Equifax vulnerable to “legal onslaught” after cyber-security breach exposes customers’ sensitive personal information (Link)
  • Toys R Us files for bankruptcy in the US (Link)
  • UK government backs tighter rules on the takeover of public listed companies (Link)

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Tagged: Banking & Finance, Brexit, Commercial Awareness, Commercial Law, European Union, Gig Economy, Regulators, Trade

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