How this ex-journalist could transform the PR industry

David Wright was a rising star at the Financial Times when he realised he could make his fortune in the PR game. He achieved that in 2003, when his consultancy, Citigate Public Relations, was acquired by Huntsworth.

But retirement didn't suit Wright. And he's back in the game with his second PR startup, PortaCommunications (AIM:PTCM). I went to see him last week. And I have to say that I was very impressed.

Porta owns the Newgate Threadneedle public relations business, for which it paid £3.8m in cash and shares last September. It is gradually building its capability in other areas of financial PR, corporate affairs and media advertising. It has hired some high profile staff, opened offices in Brussels and Scotland which are already profitable, Wright told me. And it would be no surprise to see more acquisitions in the not too distant future.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Porta also runs a number of exciting divisions. There is one in particular that really stands out to me. Let me tell you a bit more about it

'Media bartering' is a win-win

What really interests me about Porta is what is known as media bartering'. Media bartering is basically a little bit of marketing industry financial engineering. It allows Porta to swap some equity risk for a guaranteed stream of income.

I had not come across this before, and found it fascinating, if you're not sure how it works, let me explain.

A company has someinventory that it cannot shift. It does not want to offloadthe stockbelow cost price because that would mean a write-down of value. So instead, it sellsthe inventoryat cost to a media barterer. The latter will agree to take the stock and sell it on, even at a loss. In return, the company agrees to spend an amount of its media budget with the barterer. Both sides win.

The company does not have to acknowledge a loss of inventory. The media barterer gets a guaranteed income in the form of an agreed marketing spend. This will be some multiple of the value of the stock and the profit margin on this will more than offset any loss on the sale.

Taking advantage of a tough economic climate

The global leader in the business, with an annual gross trading volume of $1.4bn is the US firm, Active International. Describing this form of bartering as "corporate trade", it argues that it makes "smart financial sense" because it allows customers to achieve better returns on excess inventory, while increasing their marketing reach without having to part with any cash.

Alongside Active, leaders in the UK market are Astus and Miroma, they are all trying to improve the image of a business that has in the past had a slightly grubby reputation. They want to take advantage of the tough economic climate in which cash is prized and any opportunity to wrest value out of stock must be taken.

What is more, the business has plenty of scope. It is not just about manufacturers or retailers getting rid of old stock, but the same principle can also apply to airline seats or theatre tickets.

A legal battle of media giants

In November 2011, Media Square, a marketing group, announced that it intended to take legal action against Porta and David Wright. Media Square accuses Wright of leading "an unlawful conspiracy" to back the acquisition of all or part of the Media Square Group, and is claiming £760,000.

Porta has countered that "the claims are untrue" and that they "will defend them vigorously". Whether this will ever reach the law courts is anybody's guess, but in any case, Wright is convinced that this spat has weighed unfairly on the share price of Porta.

So that is the story. I am not a great fan of the PR industry as an investment, people tend to come and go with alacrity and that can create bad feeling. For example, PR leader Huntsworth has set aside £1m to sue former staff who have broken non-compete' rules.

But if you can put up with this type of thing and want to back a man who has built a business once and thinks he can do it again, then an investment in Porta could give you an interesting ride.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.