Welcome to a re-run of 2008-09, judging by the huge write-downs emerging this reporting season from some major companies. Counting today’s massive effort from Fairfax Media of more than $2.9 billion, and huge cuts to come at timber group Gunns, close to $12 billion has so far been written off by more than a dozen big companies, concentrated in the media.
Here’s the list: News Corp $US2.8 billion; BHP Billiton $US2.3 billion; Fairfax Media $A2.938 billion; BlueScope Steel $A900 million-plus; Gunns Ltd $A600 to $A700 million (likely); Pacific Brands $A502 million; APN $NZ485 million; Sims about $A450 million; Goodman Fielder $A267 million; Paperlinx $A266 million; and Bendigo Bank $95 million. There have been others that reported losses earlier in the year, such as Leighton Holdings (which also had big losses and write-downs the year before, as did Paperlinx and Goodman Fielder).
Many of these figures are net of tax (it’s hard to work out what’s what from the statements — News’ and BHP’s are the gross figures), so the gross value of the write-downs could be another $1 billion or more. Companies call these “net cash” write-downs, to give the impression there’s no financial impact for it and to reassure shareholders. That fudging of the true situation goes some way to explaining why many Australian companies waste valuable capital, which in turn drags down national productivity.
But there is a very financial cost. In some cases, the cuts in goodwill and intangibles reflect the value between what the companies previously paid for assets and what they actually paid for the company. Take Fairfax: it paid $2.3 billion in 2006 for Rural Press. The assets were small, the price huge. The bulk of the price was represented in the accounts as goodwill and the value of mastheads and other business names. The intangibles made up the difference between the purchase price and the value of the assets bought.
Now the assets are no longer worth as much (big write-downs have been taken in previous years) so their value has to be cut or “impaired”. There might be no actual cash cost in the current write-down, but based on the previous buying price, there is and shareholders are the losers with billions of dollars.
These write-downs damage productivity because they represent unproductive investment by business. In 2008 and 2009, the write-downs were more than $100 billion and Australian business raised more than $120 billion in new capital. Some of that money is involved in the latest write-downs, so some companies are wasting valuable investment for a second time. No wonder multifactor productivity is weak in this country and labour productivity reasonable.
BHP took most of its write-downs in the US in its shale oil and gas business. But several years ago it took $4.8 billion in losses on poor investments in nickel in WA and Queensland. The latest write-downs in fact contained more losses against the nickel business.
So far News Corp tops the list with that $US2.8 billion write-down announced a fortnight ago to right size the value of the company’s publishing assets before the expected separation some time in the next year. That was dominated by the impact of the closure of the News of The World over the phone-hacking scandal. News also had $US200 million in other costs linked to that and restructuring in Australia, which will see more write-downs and restructuring costs in the current financial year.
The write-downs this time reflect the wasted earning power of the News of the World in London, which was closed last year as part of an attempt by Rupert Murdoch to mollify his critics over the phone-hacking scandal. Judging by comments from News earlier this month, further write-downs of up to $US2.2 billion could happen, especially with the News Ltd papers being restructured an losing their earnings power and value.
It was in fact the third major set of write-downs from News in five years: the biggest was $US2.8 billion off the $US5.6 billion purchase price of The Wall Street Journal, the the cumulative cost of more than $US600 million for the silly MySpace adventure.
The write-downs at Pacific Brands are particular egregious. The company, under CEO Sue Morphet and chairman James MacKenzie, adopted a strategy that involved almost blowing up the company to try to save it, or so it seems from what actually happened. The company was crippled and Morphet and MacKenzie pocketed the money and ran as the going got too tough: and it was all of their own causing.
As Jonathan Swan wrote on the Fairfax’s Business Daily yesterday: ”The outgoing chief of Pacific Brands will be remembered, perhaps unfairly, as the boss who pocketed a hefty pay rise, sacked 1800 textile workers and moved manufacturing of much-loved Australian brands to China.”
Another Fairfax business columnist, Adele Ferguson, wondered if this performance could be described as “corporate terrorism”. A tough call, but as we are seeing, the former management, chairman and board of Pacific Brands aren’t alone in this reporting season.