Pressing on with building a regional newspaper empire

Bankers to Newsquest, the aggressive regional newspaper group, were huddled in the offices of Lazard Brothers just over a week ago, poised to complete the pounds 300m-plus purchase of Westminster Press.

"We thought we had it, and it was just a question of closing the deal," says Jim Brown, the Scottish-born, former investigative journalist who heads the UK's largest local newspaper company. But Lazards, on behalf of the sellers, Pearson, was keeping its options open.

In a separate office several blocks away negotiators for the Mirror Group and Independent Newspapers, the rival consortium, were still in the hunt, while bankers to United News & Media, which had never tabled a formal bid for the 65 titles, were seen being shepherded into a side corridor at the Lazard City offices.

"We were shocked to realise that we still had competition," Mr Brown said in his utilitarian offices in south London late last week, by which time Newsquest had emerged victorious.

The threat of rivals was enough to convince Mr Brown, and his key financial backers, US leveraged buyout specialists KKR and UK media investment fund CINVen, to lift their bid from pounds 295m to pounds 300m and then to pounds 305m. That clinched the deal, to Mr Brown's now evident pleasure.

The tall, personable newspaper man is an unlikely wheeler-dealer. Blunt, yet wholly affable, he has none of the conspiratorial air that seems to characterise some in the upper echelons of media companies. Yet his knowledge of the business is encyclopedic: he knows, it seems, everyone, and can reel off facts and figures about the regional newspaper industry virtually title by title.

A well-known journalist north of the border, he started out as a junior reporter at the Ayreshire Post, following in the footsteps of his older brother, Ian. He rose through the ranks of Scottish journalism, including stints in Glasgow, until Thomson Newspapers gave him a management job.

Reed headhunted him 16 years ago, and there he thought he would stay: a hired hand, even if he eventually got to run the shop on behalf of the corporate parent. Until a year ago, Mr Brown, then just turned 60, was contemplating retirement and "wondering what it was I was going to do with all my time". But his life changed radically when John Mellon, senior Reed executive, called him and his finance director John Pfail in one morning to announce the newspapers were to be sold as part of a radical restructuring at the Anglo-Dutch media giant.

Reed wanted high-margin, hi-tech "must-have" information assets, not local newspapers like the Worcester Journal, with its coverage of local flower shows and A-level results.

Shaking off the initial shock, the two men immediately said they would like to lead a management buyout team - an idea they had toyed with for years, even though they had never believed that Reed would sell its profitable chain of 125 weekly and daily newspapers and freesheets.

An auction process followed, with Mr Brown's group claiming victory with a pounds 205m bid. "The key was KKR," Mr Brown says. "They believed in us, and were prepared to back us fully." The US buyout company, famous for its purchase of Nabisco, has decided the regional newspaper business in the UK is a winner, and believes there is money to be made in the current wholesale consolidation, which has seen Thomson, Emap, Reed and Pearson all sell their regional titles.

Reed insisted that the name Reed Regional be dropped, and the the management team spent several months looking at likely alternatives. Mr Brown liked the name "Quest" but discovered it had already been registered. It was Mr Brown's secretary who came up with the name "Newsquest", which she shouted through the door during one of the team's many brain-storming sessions.

A bare six months later, Mr Brown and his management team, who now own 12 per cent of Newsquest, were at the deal-making table again, gunning for Westminster Press.

Now that they have built a pounds 500m company, the time has come to consolidate, Mr Brown admits. "Some of the [Westminster] titles are in good shape," he says. "Others will require more investment."

That, by all accounts, is a polite way of saying that Pearson's management cut the company to the bone to enhance earnings in advance of a sale. There are also suggestions that some titles, notably the Brighton Argus, have suffered serious circulation declines.

Newsquest insiders say the cuts were indiscriminate and potentially damaging. Mr Brown, however, is polite: "We will have to move immediately to invest in the sales and marketing side, which may have been cut back too much," he says.

Other bidders for the titles were concerned that Westminster's profits, running at about pounds 25m a year, would not be sustainable in light of the radical budget cuts.

Mr Brown disputes that: "We would not have bought them if we thought we couldn't sustain the profits," he says. "We ran all the scenarios, good and ill, and it would take an incredibly bad stroke of luck to fail."

Mr Brown believes wholeheartedly in the pounds 2.5bn regional newspaper business, which he sees as having a bright future despite all the doom and gloom about newsprint prices, and the competitive threats from the Internet, cable television and local radio. "We have a franchise for the information in a community: an infrastructure for news and an infrastructure for advertising," he says.

But he expects that only the larger groups will be able to survive the current consolidation. "There will always be room for small newspaper companies, but the middle group will get squeezed."

That suggests Newsquest, and the other big regional players such as the Daily Mail's Northcliffe, Johnston Press, Trinity International or Midland, could end up winners in the consolidation that analysts insist is not over yet.

Indeed, Newsquest might be considered an archetype for the kind of company that can best run local titles. Its management is wholly focused on the regional market, unlike the big, often multi-national businesses that used to dominate. It can seek cost savings by creating common back offices and sharing printing. It can make alliances with local companies - in radio, for example, or in electronic publishing - but on the level of the community rather than on a grander scale.

"Newspapers are still an important part of community life in the UK," Mr Brown says. "I can't see why that should change."