Staple Local
Net assets valuation = 15/18 x $66·6m = $55·5m.
It is assumed that the titles in this division are equal in size.
The division’s pre-tax profits are $4·5m and post-tax cash flows $0·3m, with losses forecast for the next year. Therefore any valuation based on current or future expected earnings is likely to be lower than the net assets valuation.
Benefits of selling Staple Local
The local newspapers seem to have the poorest prospects of any part of the group. Further investment may not make a big difference, if the market for local newspapers is in long-term decline.
The offer from Postway Co gives Staple Group the chance to gain cash immediately and to dispose of the papers. The alternative of selling the titles off piecemeal is an uncertain strategy, both in terms of the timescale required and the amounts which can be realised for individual titles. It is very likely that the titles with the best prospects would be sold first, leaving Staple Group with a remaining portfolio which is of very little value.
Drawbacks of selling Staple Local
The offer is not much more than a net asset valuation of the titles. The amount of cash from the sale to Postway Co will be insufficient for the level of investment required in the Daily Staple.
The digital platforms which will be developed for the Daily Staple could also be used to boost the local papers. Staff on the local titles could have an important role to play in providing content for the platforms.
Loss of the local titles may mean loss of economies of size. In particular, printing arrangements may be more economic if both national and local titles are printed at the same locations.
Staple View
Free cash flows to equity = $53·5m – $12·5m – $6·2m = $34·8m
Free cash flow valuation to equity = $34·8m (1·04)/(0·12 – 0·04) = $452·4m
The assumption of constant growth is most important in this valuation. It is possibly fairly conservative, but just as faster growth could be achieved by gaining the rights to broadcast more sporting events, results may be threatened if Staple View loses any of the rights which it currently has.
Benefits of selling Staple View
Present circumstances may be favourable for selling the television channels, given their current profitability. Staple Group may be able to obtain a better offer from a competitor than in the future, given recent acquisition activity in this sector.
Selling Staple View will certainly generate more cash than selling either of the smaller divisions. This will allow investment not only in the Daily Staple, but also investment in the other divisions, and possibly targeted strategic acquisitions.
Drawbacks of selling Staple View
The television channels have become a very important part of the Staple Group. Investors may believe that the group should be focusing on further investment in this division rather than investing in the Daily Staple, which may be in decline.
Selling the television channels removes an important opportunity for cross-selling. Newspaper coverage can be used to publicise important programmes on the television channels and the television channels can be used for advertising the newspaper.
Staple View is a bigger part of the group than the other two divisions and therefore selling it is likely to mean a bigger reduction in the group’s borrowing capacity.
Staple Investor
The valuation made by the finance director is questionable as it is based on one year’s profits, which may not be sustainable. There is no information about how the additional earnings have been calculated, whether the finance director has used a widely-accepted method of valuation or just used a best estimate. If a premium for additional earnings is justified, there is also no information about whether the benefit from staff’s expertise and experience is assumed to be perpetual or just to last for a certain number of years.
Benefits of selling Staple Investor
This division appears to have great potential. Staple Group will be able to sell this division from a position of strength, rather than it being seen as a forced sale like selling the Staple Local division might be.
The division is in a specialist sector which is separate from the other areas in which Staple Group operates. It is not an integral part of the group in terms of the directors’ current core strategy.
Drawbacks of selling Staple Investor
The division currently has the highest profit margin at 19·7% compared with Staple National 12·5%, Staple Local 3·0% and Staple View 14·8%. It seems likely to continue to deliver good results over the next few years. Investors may feel that it is the part of the group which offers the safest prospect of satisfactory returns.
Investors may be happy with the structure of the group as it is, as it offers them some diversification. Selling the Staple Investor division and focusing more on the newspaper parts of the group may result in investors seeking diversification by selling some of the shareholding in Staple Group and investing elsewhere.
Although Staple Group’s management may believe that the valuation gives a good indication of the division’s true value, they may not be able to sell the division for this amount now. If the division remains within the group, they may achieve a higher price in a few years’ time. Even if Staple Investor could be sold for the $118·5 million valuation, this is less than the $150 million required for the planned investment.
Conclusion
Selling the Staple View division offers the directors the best chance to obtain the funds they require for their preferred strategy of investment in the Daily Staple. However, the directors are not considering the possibility of selling the Daily Staple, perhaps in conjunction with selling the local newspapers as well. Although this could be seen as selling off the part of the group which has previously been essential to its success, it would allow Staple Group to raise the funds for further investment in the television channels and the Staple Investor division. It could allow the directors to focus on the parts of the group which have been the most successful recently and offer the best prospects for future success.

Stakeholder conflicts

If Staple Group takes a simple view of the role of stakeholders, it will prioritise the interest of shareholders over other stakeholders, particularly employees here, and take whatever actions are required to maximise profitability. However, in Staple Group’s position, there may be a complication because of the differing requirements of shareholders. Some may want high short-term profits and dividends, which may imply significant cost cutting in under-performing divisions. Other shareholders may wish to see profits maximised over the long term and may worry that short-term cost cutting may result in a reduction of investment and adversely affect staff performance at an important time.

Transformational change of the newspaper business is likely to require the co-operation of at least some current employees. Inevitably redundancy will create uncertainty and perhaps prompt some staff to leave voluntarily. Staple Group’s management may want to identify some key current employees who can lead the change and try to retain them.

Also the policy of making employees who have not been with the group very long redundant is likely to make it difficult to recruit good new employees. The group will probably create new roles as a result of its digital investment, but people may be unwilling to join the group if it has a reputation for bad faith and not fulfilling promises to develop its staff.

Ethical issues

The significance of what the firm’s annual report says about its treatment of employees may depend on how specific it is. A promise to treat employees fairly is rather vague and may not carry much weight, although it broadly commits the firm to the ethical principle of objectivity. If, however, the policy makes more specific statements about engaging with employees and goes in the statement beyond what is required by law, then Staple Group is arguably showing a lack of honesty if it does not fulfil the commitments it has made.

The suggestion that managers should ensure that employees who are perceived to be ‘troublemakers’ should be first to be chosen for redundancy is dubious ethically. If managers do this, then they may be breaking the law, and would certainly be acting with a lack of honesty and transparency.