The Financial Director interview - Large, media, smaller

Life was tough enough for the Scottish Media Group (SMG), owners of Scottish and Grampian TV, the Glasgow Herald and Virgin Radio, before the attack on America. The fortunes of any one company pale into insignificance in the light of that horror, but life continues and businesses keep ploughing forward, albeit in more confused circumstances.

If it was hard to predict the temper of the markets prior to Tuesday 11 September, forecasting has now become close to impossible. These are times to test the mettle of any FD. When George Watt took over the FD slot at SMG from his predecessor, Gary Hughes, in August 2000, the dotcom crash had already begun and a global slowdown was beginning to show on the cards. Looking back from today’s circumstances, however, those days seem to have a rosy tint to them.

On the face of it, SMG’s latest six monthly interim results to the end of June 2001 – due to go out to shareholders on 25 September – are not exactly bereft of bright spots. In fact many a telco or IT company would view these results with envious eyes, with the group making a double digit pre-tax profit.

But it’s hard to imagine that the board or the shareholders will feel much elation after a #10m drop-off in pre-tax profits or a #13m fall in revenues (respectively down a third to #20.0m before extraordinaries and goodwill, and £139.7m as compared to #152.7m). The crunch has come home to SMG and from here on in, things could get a lot tougher.

Not that the board in general or Watt in particular need shoulder any blame for the downturn so far. The reason is simple: SMG’s lifeblood is advertising revenues, and for some months now advertisers have been in full retreat across all channels. As Watt himself notes, “It was already the worst radio market for a decade and the worst ITV market for 30 years. Now things look even more difficult …” Managing in adversity is, of course, a skill in its own right. However, at 33, and as one of the youngest FDs in the FTSE-250, Watt was just 20 when the markets went into a tail spin back in 1987. This is his generation’s first grown-up view of life on the down slope. However, the idea of yo-yoing fortunes is not new to groups like SMG. Theirs is a violently cyclical business anyway, and the skills required to steer a stable course in the media game at any time, as it turns out, are pretty much what is required to steady the ship in hard times.

“We are already coping well in very difficult markets. We are not masters of our top line so what we do is focus very carefully on our cost base. We are a people business, which gives us some flexibility to match our resources to market demand,” Watt observes.

Over the last two years SMG’s fortunes have been built through a series of astute acquisitions. Buying Virgin Radio in March 2000, when Watt was already ensconced as financial controller at SMG, got the company into the fast-growing world of radio advertising. Before that, buying Primesight took SMG into another lucrative market, the hoardings billboard advertising game. Watt’s role in all this is to set up funding lines that have the right balance and structure to them. It is also his duty now to listen to the schemes of his colleagues on the board, the managing directors of SMG’s various lines of business and to test the underlying commercial realities of their proposals.

This may not be quite as heady a game as some FDs with a more international sweep to their M&A work enjoy, but it has been critical in ensuring that SMG’s forward momentum keeps the balance of revenues to debt moving in the right direction. The absence of any international play is simply a function of SMG’s current size in the media world. As Watt puts it, “There are some very big global publishing groups. We have to forge a strategy that is suited to our size in the market.” But for a company that has its roots and much of its history in the Scottish market, getting a national dimension, which the group now very much has, is ambition enough for now.

Watt’s path to his present position has been via what many in industry would consider to be the classical route for a CA – bags of audit work, wearing the colours of KMPG, with a good deal of due diligence investigative work across any number of industry sectors, and a little forensic accounting thrown in. A decade of that sort of thing is generally enough to give a person a pretty shrewd idea of what makes the average company tick.

Any more than a decade of it, and you start seeing the same sights a tad too often. At that point it is definitely time to be looking for pastures new. Watt hit this state in 1998, when a head hunter rang to see if he was interested in the position of financial controller at SMG. “I was a senior manager at KPMG. I’d done all the usual things and it was really time for a change. SMG was a very interesting company, one of Scotland’s bigger PLCs and a very successful media group. It looked like a good career move at the time and it has certainly turned out to be so in practice,” he observes.

When he joined the company, it was in the throes of bedding down the acquisition of Grampian TV. This was quickly followed by the Primesight acquisition and then by the purchase of cinema advertising specialists, Pearl & Dean. These deals created a real sense of excitement in the head office finance function and gave Watt valuable experience under the leadership of Gary Hughes.

In its own way, each deal has turned out to be a key strategic play for SMG. It took a canny eye on the part of the SMG board, for example, to spot the real growth potential in the outdoor display panel market. The company’s acquisition of Primesight, gave it a platform to grow an advertising channel that, like the billboard market, is considerably under-developed in the UK, by comparison with Europe and the US.

At the same time, the deal with Pearl & Dean gave the company another key piece in a multichannel package. As Watt points out, cinema advertising may only account for 1% in total of the UK’s advertising budget, but it is a channel that advertisers absolutely love. When folk sit back in their seats, popcorn in hand, and the lights go dim, they are nailed there for the duration.

There’s no getting up to put the kettle on and no distractions. Movie goers are an ad person’s dream. You get focus and you get retention. Plus the target audience is the right mix of the young and the affluent.

Of course, as Watt observes, to perform to its best potential, cinema advertising, like any advertising, needs good content – to bracket the ads, as it were. Last year was not a vintage year for new film releases and the audience figures and advertising revenues suffered accordingly.

So far 2001 has been a mixed bag. This, of course, provides another indication of the truth of Watt’s point about the company – or any company in this game – not being entirely the master of its own top line.

What it is master of, though, is the strategic thinking it brings to assembling and utilising its portfolio of offerings. “What we have done that has proved very attractive to advertisers is to offer them bundled deals that can include a mix of any and all of newspaper, radio, billboard, TV and cinema advertising. This approach is proving very attractive,” he notes.

SMG’s canny deal making clearly attracted attention. EMAP, a publishing giant on a somewhat larger scale to SMG, happened to be on the lookout for a way of forwarding its international M&A activities. It took a fancy to SMG’s FD, Gary Hughes and in August 2000 it offered Hughes the job of Group FD, which he duly accepted. This created what many might consider to be the opportunity of a lifetime for Watt. Despite the fact that he could muster barely three years’ experience in the industry the SMG Board was so impressed with his work as financial controller that they decided to give him a shot at the job.

However, as Watt recalls, he was not given an easy ride. “The company used the same firm of recruitment specialists to interview me as they would have used to find someone from outside. I was psychometrically tested, assessed and interviewed to see if I had the right stuff for the job.” Watt came through the scrutiny in good order and was made acting FD – the appointment was ratified in February 2001.

Much of his work as financial controller had involved liaising with banks and institutions raising acquisition finance and this became even more essential as the company set about planning its next venture.

So far SMG’s strategy has been to buy companies with solid revenue streams at prices that have meant that each acquisition added more by way of revenue than of debt. The group’s declared policy is to continue to grow through acquisitions, so Watt will have his work cut out analysing the targets put forward by the corporate development function.

The media industry is a very fast moving one, and is still ripe for consolidation.

This, combined with planned governmental changes to the regulatory environment, means that there are very positive possibilities and challenges for the future, despite the harsh economic climate. There may well be further adventures such as the dawn raid SMG staged on SRG (Scottish Radio Holdings, the largest commercial radio company in Scotland) on 8 December, netting 29.5% of the stock.

At the time, as Watt explains, SMG deliberately stayed short of the magic 30%, at which point it would have had to launch an all-out bid for SRH, which has a market cap of around £400m. (SMG’s market cap is around £550m).

“It was a very exciting day, with a few heart stopping moments,” says Watt. “That was a positioning move, ahead of changes to the regulatory structure. We’re hoping for a relaxation of the cross-media ownership rules and if we get this we are very well positioned.”

If SMG gets its way on the regulatory front, if a full scale bid is successful, and if the markets rediscover the art of soaring, Watt could find himself the FD of a billion pound turnover company before he reaches his 35th Birthday. It’s the kind of story that may well have audit managers around the country packing their briefcases, stowing their laptop PCs and heading for a career in industry.

CURRICULUM VITAE

Name: George Watt

Age: 33

Degree: Bachelor of Accountancy, University of Glasgow

Qualification: CA, 1991

Career:

2000 – Group finance director, SMG plc (appointed to the board February 2001)

1998-2000: Group financial controller, SMG plc

1994-1998: KPMG, Glasgow

1992-1994: KPMG, Philadelphia

1988-1992: KPMG, Glasgow

Biggest challenge: “The current tough marketing conditions and expectations of worse to come.”

Biggest hassle: “The current outmoded regulatory environment, with the nonsensical cross media ownership restrictions.”

You can be FD of any company but SMG, which would you choose?: “I’d choose to FD of Walt Disney Corp. The cross-media approach at Disney is very exciting.”