US TV giant CBS and its part-owner Sumner Redstone have sent a chill through the world’s media companies, large and small.
Redstone was margin called on Friday on 20% of his holding in Viacom, a move that shocked US investors, and CBS (which is part of his media empire) revealed that it had written down the value of its intangible assets by a huge $US14 billion because of the worsening state of the American economy.
Besides resounding through the media sector, the write-down and the company’s attributing it to the worsening US economic picture will force companies in other sectors, such as consumer products and retailing, to start conducting impairment tests on the value of their intangible assets and goodwill.
If the US and global economies continue to worsen, they will be forced to make cuts. It could be seen as part of the market to market process that forced banks and other financial stocks to make huge write-downs and take huge losses on the value of a widening range of assets, but all spring from subprime mortgages and associated derivatives.
The company said in an earnings update (which revealed a slump in third quarter adjusted earnings was now expected ) that:
The continued economic slowdown in the United States has adversely affected advertising revenues across the Company’s businesses, primarily at the local level, and the effects of the current financial crisis are likely to cause further declines in advertising spending. As a result of these market conditions, the Company is revising its 2008 full year business outlook for both adjusted operating income before depreciation and amortization (“OIBDA”) and adjusted operating income to a decline of mid-teens versus 2007.
Redstone controls both Viacom (MTV) and CBS was forced to put around 20% of his stake in the two media giants to loan calls at his holding company, National Amusements Inc.
The sale was revealed Friday night in the US after Viacom reported preliminary quarterly earnings that missed analysts’ estimates and CBS revealed its shock $14 billion write-down. Both companies cut their profit forecast for the rest of the year and the shares had their biggest falls since they were split at the end of 2005.
The $400 million sale of non-voting stock by Redstone will put pressure on CBS and Viacom shares on top of the slump in the advertising industry. Viacom’s lower forecast reflects a rapid softening of the economy and uncertainty in the outlook for ad growth, a point emphasised by CBS in its statement.
Bloomberg reported that a Moody’s analyst, Neil Begley said that CBS’s write-down may signal more impairments for companies that are vulnerable to the weakening economy.
“You combine an acquisitive company with a cyclical industry and a cyclical downturn, and you’re going to have a lot of impairment charges,” Begley said.
That sums up a lot of companies in media in the US and around the world. Rupert Murdoch’s News Corporation would have to be high on the list after its $US6 billion cash buy of the Journal Company and its Wall Street Journal and associated interests a year ago.
Its AGM is in new York on Friday and we won’t hear a word about write-down, or a word from his newspapers about the implications of the move by CBS.
Media companies in the UK, Europe, Australia and Britain will be forced to start considering impairment tests at end of quarters or reporting periods as a result of the CBS move. The private equity deals with the Seven and Nine Networks here come to mind, as does the valuations in the balance sheet of the Ten Network’s Canadian owners, CanWest.
Investment analysts have already put the shares of many companies on sell or low ratings because of the slumping ad demand, the impact of the internet on readership or on classified ad volumes, and the poor outlook for many economies.
The credit slump over the past months to five weeks has intensified, as we know, and this has pushed many economies, such as the US, Europe and the UK, not to mention Japan and even Australia and New Zealand, much closer to recession, or deeper into a slump.
Pay TV has long been considered to be one of the last parts of the media industry that will suffer a slump because of its dependence on contracts from subscribers, but US cable groups have been losing ground as the housing slump and foreclosures have seen tens of thousands of accounts lost. There’s fears in the UK and continental Europe that the same might start happening there.
Merrill Lynch has already downgraded Foxtel’s outlook here because of falling ad revenues and rising churn rates as more consumers drop off, but it and other investment houses are gloomier on the outlooks for the likes of Fairfax, ten and Seven Network.
News Corp is said to be set to ride it out by Merrill Lynch, which has been an enthusiastic supporter. News has a wide spread of media interests in the US and Europe, but there have been signs of dropping ad sales and revenue pressures in the news Corp network TV business in the US, while the film studio hasn’t had a mega box office hit for a while. But Pay TV in the UK and Italy has been strong. After the past week or so, though, the question is, for how long.
CBS, the owner of radio and television stations, will reduce the carrying value of goodwill — which is related to acquisitions — as well as FCC licenses and investments. Profit excluding non-cash items will drop this year in the mid-teens in percentage terms from 2007.
That is going to have a dramatic impact on CBS’s assets: it had $US30 billion in goodwill and intangibles out of total assets of just over $US41 billion. That total has been cut by a third and the intangibles and good will be almost 50%.
News Corp had total assets at June 30 of just over $US62 billion, but its biggest areas were goodwill, $US18.62 billion and Intangibles with $US14.62 billion, for a total value of just over $US33 billion.
News has other businesses than just broadcast, radio and outdoor, plus cable interest which form the backbone of CBS, and its directors would say it doesn’t need a write down, but the CBS move increases the pressures on all companies, media, consumer products etc which have high values for goodwill and other intangibles in their balance sheets.
Directors are now required to make frequent impairment tests on their assets and their values with consideration to their ability to continue to earn revenues and profits. it’s one of the reasons why so many property and infrastructure companies revealed write downs in Australia this year as interest rates rose, the economy here, in the US and UK slowed, and future earnings prospects vanished, especially as credit started drying up.