Trinity Mirror continues to be dogged with debt and pension deficits.
Trinity Mirror (LSE: TNI) enjoyed a 2.2% increase in circulation of its national titles in 2011, much of which was due to the closure of the News Of The World.
Unfortunately, this false dawn ended when Rupert Murdoch launched the Sun on Sunday at the end of February.
Trinity Mirror's capitulation has been swift -- after just one week, it abandoned its attempt to match the Sun on Sunday's 50p price and returned its Sundays to their regular price of £1.
Trinity expects a 1% fall in its circulation figures from March, a problem which will compound this company's near-toxic debt and pension situation.
A house of cards
On the face of it, Trinity Mirror is still a profitable business. Revenues declined by just 2% last year, falling to £746.6m.
Beneath the surface, however, greater problems lurk.
Operating profit fell by 33% to £92.4m and profit before tax dropped by almost 40%, falling from £123.7m to £74.4m. Earnings per share fell 30%, from 44.6p to 31.4p, placing the company on a current price-to-earnings (P/E) ratio of just 1 -- of which more later.
Debt disaster looms
Things get even worse when you take a look at Trinity Mirror's current debts and pension deficit.
Although net debt fell from £265.9m to £221.2m in 2011, it still remains a problem. Trinity has £69.7m of debt repayments coming due in June 2012, and has already admitted that part of this will be funded using its bank facility -- known to the rest of us as an overdraft.
In my book, using short-term debt to repay longer-term debt is recipe for disaster.
What's more, in order to secure its latest bank facility, Trinity has had to negotiate a reduction in pension deficit payments from £33m to £10m for the next three years – despite the fact that its pension deficit rose from £161m to £230m in 2011.
It all seems a bit desperate to me.
Trinity's big income problem in 2011 was advertising. Advertising revenues fell by 11.2% in Trinity's national papers and by 3.8% in the group's regional newspapers.
Trinity is hoping to replace this income with revenue from its internet projects, but it's still early days, although digital activities now drive 11% of its regional revenues.
A costly bargain
As I've already mentioned, Trinity's current P/E is just 1. However, with heavily indebted companies, a fairer measure is the debt-adjusted P/E ratio (Enterprise Value / post-tax profits).
Using this metric, Trinity Mirror has a P/E of 4.14 -- still low, but reflective of its high-risk status.
Not with a barge pole
If it wasn't for Trinity Mirror's debt and pension situation, it would offer great value. I think that Trinity has as good a chance as anyone else of overcoming its other challenges.
However, for me, the combined debt and pension deficit are a dealbreaker. Trinity Mirror is just too risky and thoroughly deserves its current low price.
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