What a difference a year can make. Just 14 months ago, Niall McGarry, the Co Mayo born entrepreneur, was happily outlining his plans to make Maximum Media the “most influential” media business in Ireland by 2022 and to conquer the market in Britain.
Sales across both the UK and Ireland had reached €11.5 million, and staff levels had risen to a combined 170 across Dublin, Galway, Manchester and London. It had gained a huge audience of 42 million followers on social media, with 12 million of these associated with Ireland.
Breaking out of Ireland was a serious achievement by the business, and it did it while larger rivals like Independent News & Media exited international markets, or required tens of millions of euro in shareholder loan support like Communicorp.
With a 68 per cent stake in the Irish entity and a 80 per cent holding in the UK business, McGarry was the dominant force at the company and its portfolio of brands such as Joe, Sportsjoe and the female focused Her.ie.
Having raised millions from tax break investors and borrowed even more from venture debt lenders to advance his expansion plan, McGarry, a marketing graduate, was bristling with intent and relishing the future.
“Venture debt suits us,” McGarry told The Irish Times journalist Mark Paul in a lengthy interview. “It’s petrol for the fire, a loan to go and make the business bigger.”
Last week, however, purveyor of that petrol took a lighter to the business. Beach Point Capital, a US credit fund that had advanced €6 million to Maximum Media, dispatched lawyers to the High Court in an attempt to salvage the Irish wing of McGarry’s media empire.
Outlining how it had become insolvent, the funder sought bankruptcy protection for Maximum Media in Ireland through the appointment of an examiner. Although not without precedent, creditor led appointments are extremely rare – since examinership law was introduced 30 years ago, the number of such cases can be counted on one hand.
But, as court filings show, Beach Point felt it had little choice but to make the move. Relations between the lender and the borrower had become strained following issues over its accounts and a controversial ‘click farm’ scandal.
Following an assessment of the company’s operations, it decided it could recoup more of its money by trying to salvage the business rather than liquidate it immediately. An expert report by Paul McCann, a senior partner with Grant Thornton, agreed.
On May 12, McGarry had sought a “standstill” for a couple of months, saying his business could pay salaries or Beach Point but not both. But the die was cast.
Last Friday Beach Point asked the court to appoint Shane McCarthy, a restructuring partner with KPMG, as interim examiner. The full petition will be heard shortly, where McGarry will be entitled to give his own view. If confirmed, McCarthy will have 100 days to save the Irish operations – the UK business is owned through a separate structure and is performing solidly.
But what went so wrong over the last year to threaten the future of the high profile media business? Financial documents, expert reports and court filings shed new light on the rise and fall of Maximum Media’s Irish operation.
There are an estimated 31 alternative, non-bank lenders in the Irish market. The majority of these are active only in secured lending to the property sector. Beach Point Capital is one of just a few cash-flow lenders.
The fund entered the Irish market via its acquisition of a portfolio of loans originated by BMS Finance Ireland, which, founded in 2016, was backed by the Ireland Strategic Investment Fund. It had a significant exposure to the media sector, having also provided credit to Irish Studio and to the company behind the Business Post.
It also put up a hefty €6 million facility for Maximum Media. Non-bank lenders charge higher interest rates than traditional lenders. Maximum had monthly interest repayments of €68,000.
Last year, however, Maximum asked for more. Filings show that in August 2019, Beach Point rejected the request over concerns “in respect of the financial of the business”.
Following a review of its accounts, the lender was worried that both revenue and costs were simply not being recorded correctly. During the audit for the 2018 financial year, there were a number of adjustments to the “management reported numbers” which saw Ebitda for the Irish unit fall by €336,000 – resulting in a swing from a €96,000 surplus to a €243,000 deficit.
The majority of the audit adjustments were due to “incorrect cost allocation across time periods and failure to recognise FX movements”, according to the expert report prepared by Paul McCann.
There were further indications of poor financial controls in Ireland, including a €700,000 reversal of accrued income, and despite ongoing cash constraints, a significant debtor overhang. No margin analysis was being completed on contracts, the lender discovered. As long as the business was growing quickly it could fix these issues, but it left the business vulnerable.
For the first three months of this year alone, it lost €954,000 and posted sales of just €551,000.
There was also the small matter of a brewing ‘click farm’ controversy that damaged brand reputation and resulted in its largest advertiser cancelling all contracts for a period.
Maximum had already carried out a review of its options. A sales process of part of the business was mooted. Restructuring plans were prepared. Salaries were reduced by 10 per cent at the lower end of the scale to 40 per cent for its highest earners. And all of this was before a global pandemic. Covid-19 made a bad situation much worse. In the end, its lender pulled the trigger on examinership
“Increasing costs and decreasing sales”
Maximum Media Network Limited (MMNL) is the main company within the Irish group. Founded in 2010 by Niall McGarry, it launched Joe.ie, a website targeting young men. Four years later, it rolled out SportsJoe.ie as an additional platform before launching in the UK in 2015. It also launched Her.ie and Herfamily.ie targeting the female market.
The UK expansion has been successful. Within two years of launch, it had revenues of €2.2 million and that number has continued to grow, according to court filings. Today its revenues are estimated to be over €7 million in the UK alone.
The British company is owned through a separate structure, but the Irish business had a so-called golden share, giving it the right to appoint a director to the British business and also the capacity to block an appointment. Apart from that golden share and a shared finance function, the two businesses are run separately.
Niall McGarry owns 68 per cent of the Irish business, while the former Irish rugby international Jerry Flannery has a 18 per cent stake. Others, including individuals who have helped the business and family members, hold the remaining equity.
The Irish business has raised €3.1 million from tax break investors through Enterprise and Investment Incentive Schemes (EIIS). “It’s a great way to raise capital without giving away any equity,” McGarry said in 2016 interview.
The company’s business model is based around branded content, as well as digital advertising and events. According to internal figures, such content accounts for 70 per cent of revenues and includes articles written about certain events paid for by the sponsor, advertorial and promoted videos. It also delivers podcasts and live shows delivering both branded content and sponsorship revenues.
However, the company had struggled financially in recent years. In 2017, it had revenues in Ireland of €7.18 million and made a profit of €776,000. The following year, revenues had fallen to €5.9 million and it posted a €1 million loss. Management accounts for 2019 show a €2.1 million loss on revenues of €6.8 million. For the first three months of this year alone, it lost €954,000 and posted sales of just €551,000.
“Significant losses have been recorded in both 2018 and 2019 which are primarily as a result of increasing costs and decreasing sales. In 2018, the company’s sales decreased by 16.9 per cent and in the sale year cost of sales increased by 10.8 per cent,” according to the McCann report.
Another factor that impacted the company’s performance was a 25 per cent increase in wages to €4.9 million in 2019 – until recently, the company employed 90 people, but this has been reduced through restructuring to 52.
According to court documents, the media agency also said it would not re-engage with the business until McGarry resigned.
According to the McCann report, there was one other big factor behind the company’s decline in Ireland “Sales were significantly impacted during Q4 2019 when a video emerged of a click farm incident which had occurred in 2017. This resulted in the company’s largest customer with annual revenues of €1.3 million suspending all business with the company until certain conditions were met.”
His report adds: “During Q1 2020, the company regained the business of its largest customer albeit at a reduced level since satisfying certain conditions.”
Click farms and cost cutting
A click farm is a large group of low paid workers hired to lick on links – a move that artificially inflates the numbers associated with the piece. The clicks are not real, so the figures presented to paying clients are inflated.
Last November, a video started circulating on Whatsapp detailing how Maximum used a click farm to artificially inflate listener numbers to a 2017 business podcast which was sponsored by AIB.
While there are rumours about who originally made the video and who later decided two years on to circulate it on private messaging services to journalists and media executives, it is impossible to know. While the incident was one-off, it nonetheless raised serious issues for Maximum which did not disclose it at the time to either its advertising agency or its sponsor.
A few weeks later, the Business Post began covering the issue, bringing it to wider public attention. The timing for Maximum could not have been worse. It was in the middle of working on a new business series with AIB called All in Business, featuring McGarry in some episodes. And it was in the run up to Christmas when it expected to book €1 million in revenues in Ireland.
On discovering the issue, Core Media, the country’s largest media agency, suspended all business pending an investigation. Maximum arguably did not take on the story fast enough, and one article dragged into weeks of negative coverage. This resulted in a €300,000 liquidity funding crisis in late December when salaries had to be paid.
According to court documents, the media agency also said it would not re-engage with the business until McGarry resigned. McGarry subsequently resigned from the Irish business, but remained in situ in the UK which has been his primary focus in recent years. Core returned to the fold, but damage had been done.
However, the incident also raised concern within Beach Point. Following discussions with its lender, Maximum Media took a series of decision in late 2019 to address its financial woes.
1. A potential sale
The company mandated Deloitte to investigate sales options for the business – with the accountancy firm estimating that the Irish business could be sol for 1x revenue (€7 million), while the UK business was worth twice revenues, giving it a valuation of €15 million.
2. Management overhaul
McGarry stepped down as chief executive in Ireland and John Feeley was installed to help oversee the business through the sales process. Feeley did not have media experience, but he was a seasoned chief financial officer. He spent over a decade with Paddy McKillen worked on Chateau Le Coste in the South France, before moving to the Mercantile Group, and most recently working as chief operations officer with a construction and restoration business called Douglas and Stewart.
Maximum Media undertook a company wide business restructuring and presented Beach Point with a plan and supporting financial model in advance of future funding. “This restructuring involved a number of cost cutting measures but principally involved the loss of approximately 40 per cent of the company’s workforce,” according to McCann’s report.
A reasonable chance of survival?
As part of its deliberations, Beach Point asked Paul McCann to compare what the company was worth in a liquidation sales scenario versus a potential examinership. The accountant estimated that in a liquidation scenario, its goodwill and IP would be worth 0.5 times revenues for the 2019 financial year. Stripping out the CGT bill, he said the business was worth €2.28 million.
With Beach Point lined up to fund the scheme, he also noted that much of the required restructuring had already been completed.
In addition, he said there was no realisable value from the inter-company investment un the UK business in a liquidation scenario. Based on all of the data, McCann said the company would leave behind a deficit of €7.1 million in a liquidation. This would allow secured creditors such as Beach Point receive 36 cent in the euro and preferential creditors to receive a dividend of just 13 cent in the euro. McCann believed it would be worth more if it could be restructured and saved.
He said the company would begin period with opening cash reserves of just €12,000 and would require additional funding from Beach Point of €431,000 to cover cash flow outflows and pre petition liabilities as they fall due. The lender committed in a formal letter to advancing €500,000 to help the company navigate the examinership.
McCann has discussed potential opportunities for the business with Beach Point. The lender believes there are a number of ways to help salvage the business.
According to the report, these are:
“Re-establish reputation and trust amongst media agencies/customers in Ireland including ensuring that conditions stated by agencies are met and maintained in order to obtain the return of lost revenue and future growth.
“Build upon the Company’s strong audience as highlighted by user numbers and traffic through the platform.
“Obtain additional investment as indicated by the interest of more than one party in investing in the Company if the balance sheet can be restructured through an Examinership process.
“A return to profitability including as a result of recent and ongoing restructuring measures.
“Focus on commercial revenue, upskilling of staff and cross-pollination of content across the editorial.
“Introduction of new revenue streams as well as driving the brands into different markets.”
McCann concluded the business had a reasonable chance of survival if an examiner was installed. With Beach Point lined up to fund the scheme, he also noted that much of the required restructuring had already been completed.
However, he noted creditors would have to accept a write down on debts and this would also have to be accepted by the court.
For much of its ten-year lifespan, Maximum Media has been a success – entering a highly competitive media environment and carving out both an audience and a revenue stream. Its growth story in Britain saw it in four years go from €70,000 in sales to €7 million.
Its financial difficulties were not caused by Covid-19 alone, but the pandemic made its difficulties almost impossible to rectify.
The examiner now has 100 days to rescue the business by cutting deals with creditors and sourcing fresh investment.
Irish Studio was previously interested in buying part of the business. Katie Moloney, the co-chief executive of Irish Studio, was chief executive of Maximum in Ireland until November 2017. There could be synergies with its main brand Irish Central.
UK giant LadBible expressed initial interest in UK arm but withdrew once Covid-19 unfolded. It could return to the fray as the lockdown eases. Other overseas or domestic bidders could emerge. McGarry is resourceful, and yet to reveal his intentions.
Beach Point will be the kingmaker in any process. For the tax break investors, there will likely be a big hit on their capital investment.
However, all will be hoping the company – and the brands that it has developed – can be saved.