The graph is amended from the first publication; I had forgotten to adjust some of the figures for USD, which made it rather unrepresentative! I’ve now adjusted all pre-’11 figures by multiplying by the avg. USD/GBP exchange rate in that year, which gives a fairer comparison.
I first wrote about Quarto about a year and a half ago, in 2011. Back then I found it an interesting company – interesting because of the way it operates and presents its figures, for instance, which reflect a business model subtly different from the more standard buy-and-sell-stuff approach, or buy an asset and churn products off of it over its lifetime method (manufacturing). It’s a book publisher, which means it’s focused on intangibles, really – lots of cash outflow invested in new books, money which essentially disappears down the drain, and which you then hope to recoup in the years after the investment through sales. Of course, if you do this in scale and reasonably successfully it becomes basically the same as any other business – in aggregate your investments will pay off most of the time, you’ll have a steady cash inflow from previous investments and invest the majority of that into future titles, giving you cash flow in the next few years. The only difference is that somehow it feels more unstable – their investment isn’t in a nice shiny new factory, but all the nebulous man-hours and such. Still, since Quarto does illustrated books and non-fiction; self help, DIY and the like; it’s not focused on the sort of novel-based, one-off ‘big hit’ approach, either. They don’t need to find the next Harry Potter to turbocharge their performance. Something I said last time was that ‘no book brought in more than 1% of revenue’. That’s still true.
I immediately warm to that sort of business model more than I would a novel publisher. They sell all around the world, they produce a lot of books (many of them co-edition; they try to make back the cost of producing it before it’s even produced) and they simply continuously invest in new ones. It feels sustainable. A lot of their books look quite niche; The Complete Guide to Wiring is still in one of their division’s top 5 books; but there’s also more mass market stuff in there. I have an aversion to these sorts of books – ‘1001 movies you must see before you die’, for instance, is the last thing I would ever think about picking up off a shelf (why are people so enthralled by lists?!); but it’s the sort of repeated-edition publishing that you can refresh and will always have an audience. Apparently. The market has spoken, and that particular book has been around for 10 years now, so my opinion is obviously out of touch!
Anyway, with that long introduction out of the way, I saw Quarto on one of the screens I peruse earlier, so I thought I’d take another look. The share price hasn’t moved much, and perhaps things have changed or I think my previous analysis was sloppy. Well, in short – things have certainly changed, and not in a way that’s either particularly standard or particularly easily quantifiable. A drop off in revenues because of the loss of a customer or a transformative acquisition is standard fare for stock analysis – but Quarto’s story is more one of boardroom antics. Here’s a tidbit from my post last time on Quarto:
“the Chairman’s Statement is fantastic and wide-ranging, and tempts me to invest simply as I buy into his mantra – “the next lasting thing”, not “the next big thing”. His letter is filled with other equally calm and long-term viewpoints, which is what I love to see, and he has his money where his mouth is in terms of significant share ownership.”
I recall liking the chairman. He’d been there 36 years, as co-founder of the business, and by my reckoning he’d done a decent job. That wasn’t the opinion of a large (by share ownership) group of institutional investors, though; in July of last year Harwood Capital, holding 19.2% of the shares, requested a special meeting to remove Laurence Orbach as Chairman and CEO and appoint a certain Tim Chadwick as director of the company. As it transpired, Harwood Capital had clearly had eyes on the business for a while – they tried to buy it in 2003 at what the board called an ‘unattractive premium’, and had apparently been a rather longstanding critic of Orbach’s stewardship of the company. The board didn’t exactly go quietly, though. Here’s what they had to say about Tim Chadwick, the chap proposed to be parachuted into that chairman role:
The Nominations Committee does not believe that Mr Chadwick’s past track record and achievements in the publishing industry in the UK which, according to publicly available information, were largely unsuccessful, would add anything to the good governance and running of the Company during this key succession phase, and that he would be a very poor substitute for the guiding hand of Mr Orbach.
No love lost there, then. After some to-ing and fro-ing, Harwood won; Orbach was kicked out, 9 months prior to his planned resignation, Tim Chadwick was appointed, and Marcus Leaver – previously COO and a member of the board who had unanimously rejected the ousting of the previous CEO – took over in charge. Notably, the chairman/CEO role is now split. I can hardly argue against this – the chairman is supposed to hold the board to account on the running of the business, and on ensuring shareholder value is realised. How can he effectively do this if he himself is also the leader of that management?
The company appears to now be in a strange sort of spot, then. Marcus Leaver, opposed to the bid, is now leading a company which is presumably being more directly controlled by Harwood Capital – who say they run ‘active value’ funds. Their agenda seems clear – they want to more quickly realise the value of a business which they own a large stake in, and felt Mr. Orbach wasn’t doing so. I sympathise with this – I think founders and longstanding CEOs do have a tendency to empire-build, for instance, and as I said above; I don’t like the implication of a joint founder/CEO/Chairman. I’m also, obviously, aligned with their motives. As a prospective shareholder I want to see my investment appreciate in value as quickly as possible, and if chopping and changing is the best way of doing that then I’m all for it.
I disagree with a decent amount of what Orbach said – for instance his obvious distaste of e-books, and a seemingly quite stubborn decision to refuse to invest in the face of obvious increasing consumer demand – but I accept there’s still a clear possibility he’s right on that one and I’m wrong. Maybe e-books aren’t right for Quarto at the moment; this article is an interesting read on a subject which I am, as with most things I blog about, an interested outsider and not a passionate insider like much of the management I speak to or write about.
I feel like that sort of sets the stage for my discussion next time, then; how does it change the investment proposition?
— I note my posts are getting longer and more segmented (I can rarely write all I want to in 800 words as I used to!), which is hopefully testament to having more interesting things to talk about. If you feel they’re verging on the side of too prosaic, and would rather I rattled off more pithy and short investment summaries, let me know. Both are useful skills for me to employ!