GMG gives no ground to critics

Carolyn McCall describes the past 18 months as chief executive of the Guardian Media Group as challenging but refuses to give ground to critics who say the group's financial position is precarious and a deep restructuring is necessary.

"We are in very good shape, very, very good shape and we have come out of the recession very strong," she says.

GMG, owner of the Guardian and Observer newspapers as well as radio stations and regional papers, made losses of £90m, including hefty impairment charges, in the year to March 2009 (profits were £306m in the prior year) and saw its cash position fall to £83m (£577m). Losses are expected to be even wider this year.

Like most media businesses GMG has been hit hard by the downturn and an unprecedented decline in the advertising markets.

"All our businesses improved performance in December year-on-year but we are still talking about minuses [losses] across the board. January has held up very well. GMG Radio is the only division that has beaten the market," she says.

The group receives no dividend income from its two drivers of profit, Emap, the business-to- business company in which it owns a 29.5 per cent share and its 50.1 per cent stake in Trader Media group, which owns Auto Trader, the UK's leading motoring website. The cash has been ring-fenced to pay down debt.

Both investments were joint ventures with private equity group Apax. GMG is currently in talks over a possible injection of cash into Emap, which has £700m of debt.

"We have not decided what the solution is," she says. "I am not even saying that cash is the right solution. At the moment we are talking with Apax and the banks. Emap is trading well, has no serious liquidity or debt issues and is being largely hit by cyclical problems."

Emap approached lenders last November seeking to reset covenants until March 2012. Covenants are currently tight and the business is expected to report slightly lower profits of about £90m (£98m) in the year to March 2010.

GMG and Apax bought Emap for £1bn in 2008 but the business has been hit by the recession and weakened by its high debt burden, which costs £50m a year in interest payments.

Emap has warned of a "significant doubt" that it could continue as a going concern if economic conditions deteriorate and renegotiation talks with its lenders fail. Apax has written its investment in Emap down to zero but GMG has not.

The strategy behind the two private equity deals, according to GMG, was to exchange short-term profit for longer-term security. "We would do the Emap deal again from where we are sitting," Ms McCall says.

The other remaining cash reserve available to GMG, vital to support any future losses, is an investment fund of more than £200m created from the sale of a 49.9 per cent stake in Trader Media to Apax in 2007.

When asked how GMG hopes to ring-fence enough cash going forward, Ms McCall said: "I am absolutely confident we have enough cash to take us along into the future."

When the paper moved from broadsheet to Berliner format in 2005 it cost GMG £80m in new presses and since then the Guardian has lost a fifth of its circulation. It now stands at 313,000.

A strategic review, started last summer, has been completed at the Guardian and the Observer. "Yes we have made redundancies, yes we have got the cost base down to where we want it now. We are not planning any more cuts but you can never say never in the current economic environment," she says.

Losses to March 2010 at Guardian News & Media (GNM), the core division that publishes the flagship newspaper as well as guardian.co.uk, are likely to be similar to last year's operating loss of £36.8m.

"They have done it, the GNM management are so on track. The Guardian is in good shape," she says.

The Guardian, which has higher levels of permanent staffing than other UK national newspapers, has so far cut 150 jobs across editorial and commercial. More than 100 jobs will be cut this year. GNM employs 1,700 people in total.

Lorna Tilbian, analyst at Numis, said: "They have to reinvent the business model because you can't rely on the cover price and classified advertising. Now people don't want to pay for the hard copy."

In what looks like an attempt to stave off further cuts at the Guardian, GMG is in talks with UK newspaper owners over a possible sale of GMG Regional Media, which includes the Manchester Evening News and other local titles. A sale could generate up to £40m.

"We have not done a deal," she says, adding that further cuts to the group are not envisaged and that GMG Radio and GMG Property Services have a future with GMG.

Questions have been raised externally and internally about whether GNM has pursued the right digital strategy by seeking a huge online audience but not charging.

The Guardian website has 38m unique users, 28 per cent of whom stay longer than 10 minutes. GNM generates £25m in revenues from online, which account for almost 25 per cent of overall advertising revenue.

Ms McCall says that although her position is not entrenched, there is no commercial evidence that pay walls generate returns.

"It is not really the way the web works. That is not to say there are not areas of specialist content that cannot be charged for," she says.

GNM has looked at six different pay models including the "pay wall", which she believes would "suffocate our journalism, stymie it, contain it".

"It is the wrong thing to do right now because the jury is out about whether that is the way consumers are going to get information. We will watch what happens," she says.

Ms McCall dismisses the idea of any changes in the Guardian's senior management - which is known to hold the firm view that freedom of news takes precedence over any business model - as "preposterous".

The presence of the Scott Trust, to protect and enhance journalism at the Guardian, is the "envy of the world", she believes, deriding suggestions the structure may not be right for doing complex deals with large private equity groups.

Does she think GMG's finances are currently in rude health?

"Yes," she says defiantly. Some believe that her diagnosis needs a second opinion.