Profile: Neal Misell, FD of VT Communications

From warships to football scores on the radio, working for a business group
like VT seems to tick all the boxes as far as boyhood-dream business interests
go. But had the Cold War not ended, things could have been very different.

The fall of the Iron Curtain forced the company’s original incarnation,
shipbuilder Vosper Thornycroft, to diversify. Neal Misell, finance director of
the group’s communications division, explains: ‘The company knew the bottom was
going to fall out of the shipbuilding industry, so it had to look to exploit
other areas.’

Through a combination of acquisition and organic growth, VT took on its new
remit. Today revenues from non-shipbuilding activities – including defence
communications, facilities management and even careers guidance – represent
around 80% of the group’s £783m turnover.

In hindsight, the decision proved a savvy one. Just last month, the Ministry
of Defence unveiled a plan that could see British military ships built in
foreign yards for the first time. The MoD has appointed a shortlist of three
companies that will go head-to-head to come up with the best approach to
building the next generation of military support ships. Despite being one of
Britain’s biggest naval ship builders, VT failed to make the list.

The group made its move on the communications sector in 2001 with the £95m
acquisition of Merlin Communications, where Misell had worked since 2000. Merlin
was the result of a 3i-backed management buyout from the BBC World Service in
1997 to raise money for digital television – originally BBC3 and BBC Choice.

Rebranded VT Communications, today the company provides services to customers
in the broadcast, defence, space communications, security, emergency services
and public sector markets.

‘Project work – designing and building equipment– represents about 10% of our
business, and a further 10% is purely transmission where we take programming and
transmit it around the world. We broadcast 1,000 hours a day in 54 different
languages for 19 national broadcasters,’ Misell says.

Defence contracts

VT Communications supplies the military with ‘beyond line of sight’
communications. It is the main contractor for the Royal Navy Submarine Fleet
Communications project, and in 2003 secured a 15-year public private partnership
contract to provide the Defence Procurement Agency with high frequency defence
communications facilities (see below).

But reliance on the BBC for work is still huge. The World Service – funded by
the government’s foreign and commonwealth office – represents around one third
of VT Communications’ business, although the company boasts other broadcasters
on its books including Radio China and Germany’s Deutsche Welle.

In June last year, VT’s contract to distribute and transmit BBC World Service
programming was extended to 2012 in a deal worth approximately £150m.

Misell is adamant that the deal wasn’t inevitable. ‘When the original
contract was signed, it was all about short and medium-wave radio. Now there are
new ways to distribute content such as pod casting and the internet. We’ve given
the BBC flexibility to change the contract depending on how the environment
changes and how consumers want to receive programmes going forward.’

Short-band radio certainly hasn’t had its day, but Misell admits the
technology has limitations. ‘You can broadcast for hundreds of miles, but it’s
crackly and goes in and out of frequency, so it’s only really suitable for the
spoken word.’

A consortium of broadcasters, including VT, is in the process of developing a
new breed of digital short wave, known as DRM, which promises FM quality for
music, as well as the spoken word, but with all the benefits of coverage of
shortwave radio.

Trials have been conducted with Virgin Radio and there are already four
shortwave DRM transmitters around the UK. Take up will, of course, depend on the
number of households that invest in the specialist DRM receivers, with the first
devices due to hit the UK shops later this year.

The question is whether DRM is in danger of missing out on the digital
revolution as rival technology DAB becomes established in the UK. Misell thinks
not. ‘DAB is digital FM. We see it as complementary to DRM, and the consortium
has developed a device that can receive both. The secret is for the listener not
to worry about how the signal reaches their radio. At the end of the day, it’s
about choice.

‘DRM opens up the prospect of a Europe-wide radio station, but it brings
other benefits – it can carry other data, for example website information on the
screen of the radio or ‘push the red button’ opportunities. Radio is becoming
more interactive and trying to get listeners to engage more in dialogue.’

Digital boom

The good news for VT Communications is that more people than ever before are
tuning in to digital radio. Research published last month by Ipsos Mori shows
that eight out of 10 adults are now aware of digital radio, and monthly reach
for digital radio has increased from 29% to 35% over the last six months.

Misell admits that adapting to new technology is one of the main challenges
currently facing the sector. ‘The investment we’re having to make is huge, but
we can do that incrementally. We’re not having to put everything at risk.
Analogue will continue for many years to come.’

IFRS, meanwhile, heads Misell’s list of more specific financial challenges
facing the company. ‘It’s a challenge because it’s so hard to explain to a
non-accountant and the rules keep changing. The challenge is sitting down with
the MDs and saying “here’s a number that’s better than last year but it’s
lower”. That’s hard.’

On a positive note, the introduction of IFRS has led VT Group to publish a
breakdown of figures by service line, and the increased transparency shows that
the communications division is performing well. The flipside to the project is
that it forced the group to recruited centrally to find IFRS expertise, a
six-figure exercise that Misell is unconvinced has really benefited the
business.

When he’s not working, Misell is busy ferrying his young children to and fro.
He’s also training for a triathlon, with a team from Misell’s finance
department. ‘It was someone’s bright idea after the Christmas binge,’ he
complains.

In true accountant style, he admits preparation to date for the 400m swim,
5km run and 20km bike ride has so far focused more on costing equipment for the
event rather than hard graft down the gym. ‘It takes me back to doing revision
for exams at school – I seem to spend a lot of time planning.’

Naval manoeuvres

When VT Group acquired Merlin Communications in 2001, it inherited a share of
a £280m PFI contract to provide a new digital communications service to the
Royal Navy’s submarine fleet.

Private finance initiatives may have received a mixed response – just last
week a report from Deloitte argued that current PFI structures are unlikely to
address all of UK’s future infrastructure requirements – but Misell believes the
project has gone extremely well. ‘Because banks are involved,they make sure the
business case is as watertight as possible. The planning is extremely intense
and there’s a lot of due diligence before you can proceed.’

Admittedly, planning a 27-year project is not without its challenges. ‘It
forces you
to think about the project a lot more. The customer has to give you a complete

description of what they want and be very unambiguous.’

Misell sees PFI as good news for the defence sector. ‘Now you only get paid
if  you perform. Before,the customer would order an asset,you’d deliver it and
pretty much walk away. Now you get paid by results and output.’

PFI also forces more up-front financial planning than for traditional
contracts. ‘You go on courses and learn how to operate a PFI financial model,
but at the end of the day, it’s a series of spreadsheets.’