Orkla and Mecom

If there’s one British name which nearly every Norwegian is by now familiar with it’s David Montgomery, former editor of The Sun and News of the World, CEO of the Mirror Group and, since 2000 founder and executive chairman of Mecom Group, the AIM-listed media acquisitions and development vehicle. Since Mr. Montgomery agreed to purchase Orkla Media from Norwegian conglomerate and national institution Orkla at the end of June, the self-styled media tycoon has been the catalyst for hundreds of column inches of debate over the ethics of selling national publications to foreign proprietors, the fate of the country’s press, and most recently, whether the deal is going to go through at all.

Norwegians can be forgiven for all the drama. Montgomery’s proposed million Euro acquisition has not been smooth by any account; more mixed still have been the messages both Mecom and Orkla have been sending out over the past month. At first Mecom’s ownership of Orkla Media – whose empire is spread across Norway, Sweden, Denmark, Finland, Lithuania, Poland, Ukraine, and Germany, making it the fifth largest media conglomerate of the Nordic region – seemed like a foregone conclusion. On June 28, Orkla made a simple announcement of the sale in a press release, stating financial details were still under negotiation. “Mecom’s offer for Orkla Media is financially attractive for Orkla shareholders,” said CEO of Orkla Dag Opedal. “Furthermore, the solution is satisfactory with regard to the other goals that were set for the process. Based on an overall assessment, this is therefore the best solution for both Orkla shareholders and Orkla Media.”

Less than a week later, on July 3, Orkla announced that the sale would be for 7 billion Norwegian Kroner (about £614 mln), and that the parent company would be taking a 15% share and one seat on the board of the newly formed Mecom Europe conglomerate, which was to be headquartered in Oslo and run by existing Orkla Media Managing Director Bjoern Wiggen. Orkla Media would be valued at 7.5 billion Norwegian Kroner “after adjustments for cash and other financial capital”. Mr. Montgomery announced his plans to raise the money through a combination of debt and equity, giving the new entity a “leveraged buyout structure”. The deal was supposed to complete and sign last Monday on the evening of July 17, with a press conference planned for the next morning.

It’s at this point the deal began to look uncertain; that press conference never took place. The parties announced that lawyers were still finalising the deal, and that the agreement was “large and complicated, with many elements to be put into place.” Nevertheless, Orkla Media director Stig Finslo was confident; “We will finalise the agreement,” he said. Danish newspaper Berlinske and Norway’s largest financial daily Dagens Naeringsliv reported soon after that Mr. Montgomery was having trouble raising even half the money required for the acquisition, with several previously committed funds having gone weak on the deal. Orkla’s Chairman – and Norway’s richest man – Stein Erik Hagen announced from his holiday break that “we’re still following the timeframe we set up.”

This weekend came confirmation of the problems associated with the deal however as Mr. Opedal caught a plane together with a lawyer and an accountant from the company to meet Mr. Montgomery and try to iron out the problems. On Saturday, Mr. Hagen then made a surprise announcement to Dagens Naeringsliv that Orkla had a back-up plan if the deal with Mecom fell through. “We have a plan B, but I don’t wish to disclose the details,” he said.

In yet another about-turn, the mood yesterday evening after this weekend’s talk was suddenly more upbeat. “(Mecom and Orkla) have worked through the whole weekend on a possible agreement,” Mecom’s spokesman Eric Cameron told the Norwegian news wires just after six London time. “The talks have mainly taken place here and have been productive, but it is too early to say when we will reach a decision. It will take as long as it takes.”

The question is then, what’s going on and even more presciently, is this deal going to happen at all? Certainly, there are members on both sides that desperately want it to go through. For Mr. Opedal, who has been chief executive of Orkla for less than a year, this is just the kind of lucrative international deal he has been looking to make his mark with since he took over from his short-lived predecessor, the more conservative Finn Jebsen. It is widely cited inside Orkla that Mr. Opedal is the company’s next  Jens Heyerdahl, the entrepreneurial and dynamic former Chief Executive who from 1979 until 2001 turned the company around dramatically from a medium-sized mining operation into a full consumer-goods and specialist metals manufacturer. Selling to Mecom would be a savvy move: it would give Opedal a substantial amount of money to pursue his own vision for Orkla while at the same time retaining a minority – but still valuable – share in a profit-hungry European media enterprise.

Orkla media currently operates at a 7 – 8 % profit margin; it is Mr. Montgomery’s hope that he can turn this around to 15% in fairly swift order. The problem for Mr. Opedal if he were to pursue this himself would be in harming the very close relationships with unions which Orkla has enjoyed since it’s days in the mining business. What’s more, this deal flies very well with the traditonal corporate philosophy of the organisation – “ownership is more important than structure” is a frequently cited maxim inside the company’s walls in Skoeyen, Oslo.

For Mr. Montgomery of course is the chance to own one of the largest European media conglomerates in the world, and firm up positions in Germany since his controversially-received acquisitions of Hamburg Morgenpost and Berliner Verlag earlier this year, and at a comparatively low valuation (analysts have put previous valuations on Orkla Media at well over £700 mln). Battling unions is not shy territory for the former Murdoch employee either.

Perhaps most presciently of all, the deal works as mutual back scratch: both Mr. Opedal and Mr. Montgomery are young Chief Executives out to prove that they can make a mark not only in their own industries but on an international playing field. Mr. Montgomery has almost entirely ignored the UK newspaper market since founding Mecom. This accounts too for the apparent strategic discrepancy in Mr. Hagen’s statement made on Saturday and the more affirmative ones consistently made by Mr. Opedal. If both entrepreneurs wish to close this deal, they will have to quickly.

The issue seems to be almost unequivocally one of cash. In March this year, Mecom suspended its stock and announced a rights issue to raise £145 mln at 50p per share. Two months later, it had only managed to get together £70 mln at 48p per share.

The suspension of the stock remained on grounds of plans of a “major acquisition”. The previous acquisitions of the German dailies were majority partnered by American private equity firm Veronis Suhler Stevenson, since Mecom blew most of its cash on the £200 mln acquisition of Dutch LMG from Telegraaf Media Groep. If Mr. Montgomery cannot borrow or raise sufficient cash then, what are the options? This was most likely the issue on the table this weekend.

A potential solution which Mr. Opedal may have offered Mr. Montgomery is for Orkla to loan Mecom the money itself; assuming Mecom can front up half the cash, borrowing 3.5 bln Norwegian Kroner (about £307 mln) at a standard corporate bond rate of 8%, Orkla Media would still yield (albeit slight) annual profitability of £10 mln with current revenues of 8.7 bln Norwegian Kroner (about £763 mln) until Mr. Montgomery can raise the cash to pay off the loan.

If he hit his projections for doubling the profit margin, the company would be in very healthy financial shape, even without paying off the loan. This deal is about personal interest and politics as much as it is the bottom line, which is why perhaps it has been so adamantly presented as the latter. All that remains to be seen is whether the two chief executives at the front of it can pull it off in time. This will prove the first valuable test for both their ambitions.