Media

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

You only surrender control of a company for a premium, right?

Daily Mail and General Trust Plc has different ideas. It is giving up control of Euromoney Institutional Investor Plc and is receiving nothing extra for doing so. In fact, it's selling some of its dominant stake at a discount to the prevailing stock price. 

Bizarrely, this all adds up.

Controlling Stake
DMGT's holding dwarfs those of Euromoney's biggest institutional investors
Source: Bloomberg

DMGT's longstanding 67 percent ownership of Euromoney has been far from ideal structure for either side. As the holding exceeds 50 percent, the magazine publisher's accounts are consolidated into DMGT's own. Euromoney's cash pile allows DMGT to operate with a higher level of net debt than it might otherwise be able to support.

Cash Cow
Euromoney's net cash position has been getting stronger in recent years
Source: Bloomberg

As well as letting DMGT be less disciplined, this puts pressure on Euromoney to run its balance sheet for DMGT's benefit. True, the publisher's board has to consider all shareholders, but it must feel the pressure to avoid any action -- like a big acquisition -- that would weaken its own financial position.

With only 33 percent of the stock available to trade, liquidity is almost non existent. About 15,000 shares change hands daily.

Independent Companies, Really
Euromoney shares have traded in sympathy with those of its controlling shareholder DMGT
Source: Bloomberg

One obvious remedy to this would be to offload the stake completely, and get a full takeover premium for selling control, the corporate finance equivalent of a hard Brexit.

After all, DMGT -- whose sprawling portfolio includes the Mail newspapers, events businesses and a stake in property portal Zoopla -- is in tidy-up mode under new CEO and former management consultant Paul Zwillenberg. He also wants to raise cash to pay down debt.

But Zwillenberg is a man in a hurry, and it would take time to secure an outright sale at a decent price. Worse, a buyer could claim the thin trading in Euromoney shares meant their market value overstated their real worth. That would complicate any price negotiations.

DMGT's remedy looks odd, but makes sense. It is trimming its holding to a non-controlling 49 percent. That will boost the free-float and end the requirement to consolidate the business.

The snag is that limited market in the shares. So DMGT has capped the amount of stock it is selling initially to 10 percent -- still about 1,000 days' trading volume. Even then, it has had to accept a massive 13 percent discount to Thursday's closing price. Euromoney will buy back the remainder.

The plan has hit the shares hard: Euromoney tumbled as much as 11 percent in London on Friday.

But the magazine publisher's shareholders stand to gain from all this and have good reason to support the buyback. As for DMGT, it could still get a decent premium on its shrunken holding if a bidder came along now. One day, its shrunken holding could be worth more than its previous controlling stake.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net