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German media giant punished by myopic investors

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Axel Springer , Europe's largest newspaper group, spooked markets on Wednesday. It expects earnings before interest, tax and depreciation to fall by up to 9 per cent this year. Analysts polled by Reuters were expecting an increase in profit. Subsequently, Axel Springer's shares fell by more than 6 per cent. Given the company's solid fundamentals and a successful transition into digital businesses, the reaction smacks of myopia.

The owner of Germany's tabloid Bild and national daily Die Welt is coping well with the structural challenges to the media business model. In terms of revenue, its fast-growing digital operations have already become the company's most important segment. In 2012, it surpassed the unit comprising German newspapers for the first time.

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Digital businesses generated 35 per cent of total revenue compared with merely 8 per cent five years ago. Besides, only about a third of its digital sales and profit are generated by classic journalistic ventures like news portals. The bulk comes from digital marketing and online sites based around classified advertising.

Acquisitions have helped. But Springer avoided costly blunders such as News Corp.'s ill-fated acquisition of MySpace. In an industry famous for burning millions, Springer's deals are bearing fruit. In 2012, digital EBITDA jumped by 53.6 per cent to €242.9-million ($325.4-billion). It contributes 38 per cent of Springer's total EBITDA.

It is a different story at Springer's traditional print businesses. Declining print advertisement revenue led to a 9-per-cent drop in profitability of its German newspapers and magazines. But with EBITDA margins of about 22 per cent, print still is making decent money. Springer is also better positioned than peers to realize economies of scale on the cost side. After successfully pooling the editorial staff of its national paper Die Welt, its Sunday paper Welt am Sonntag and its Berlin daily Berliner Morgenpost, it is now integrating its Hamburg daily Hamburger Abendblatt into a joint newsroom. This gives rise to short-term restructuring costs – which partly explain the surprisingly gloomy outlook statement from Springer on March 6. But it generates significant cost savings in the long term.

Springer will expand further into digital businesses in 2013. Restructuring of the print units will also continue. Investors should appreciate that rather than take fright.

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