Last night’s big fall on Wall Street is further confirmation that we have an ugly global situation ahead of us. While I have the utmost respect for Reserve Bank Governor Stevens, his soothing words can’t mask the fact that we are close to the eye of the storm, because both our companies and consumers go into this downturn highly borrowed. Adding to Wall Street, the looming Babcock and Brown asset sell off, which was announced on the same day that the Australian share market officially halved from its peak, will see every board in the country checking their balance sheet asset values and the agreements with their bankers.
If the situation looks bad, then they have no choice but to raise equity at whatever price is required. Whatever today’s price is, it will be lower tomorrow if you have problems. Capital is king.
Nowhere will that process be more intense than in the media industry, where most of the players are carrying far too much debt. The problems of the free-to-air networks and APN have been well documented. What is rarely talked about is John Fairfax, owner of the Australian Financial Review, the Sydney Morning Herald and The Age, 2UE in Sydney, 3AW in Melbourne, plus a string of other radio stations, community and regional newspapers and a substantial electronic communication network.
According to the analysts, if the Fairfax EBITA falls to $620 million, it will test its debt covenants. The Fairfax EBITA in 2007-08 was around $820 million but the analysts are now saying Fairfax EBITA is likely to fall into the $720-$730 million range in 2008-09. If the economic slump accelerates and the downturn is twice the analysts’ forecast rate, then Fairfax hits the danger zone.
The share market picked up on this fact and has trashed the stock, selling it down to $1.40 — lower than the float price. It’s perhaps unfair to pick on Fairfax because it is by no means the only company in this situation. But Fairfax does illustrate an important weakness in so many Australian boards. In the good times, they could afford to ignore their stakeholders. Now it becomes imperative that all stakeholders support the company.
The first group of stakeholders are, of course, the shareholders. Here are some of the new rules: do NOT put before them a generous executive scheme and big CEO payments if the company is in trouble. You need total frankness and openness about what is happening to trading and the strategy that is being adopted. Don’t announce vague trends because whatever the real situation is, the market’s fear will double it. If generous payments are being handed out to executives and/or there is not complete frankness, then shareholders will get very angry. They will not be anxious to support equity issues. Fairfax is not alone in having lost the support of its institution and individual shareholder base. That puts the company in play and means that any equity issue will be at a very low price.
The second group of stakeholders is the banks and other financiers. They will sneer at big executive salaries — some banking executives may secretly decide to teach the million dollar plus salaried CEOs a lesson. Like shareholders, they want an action plan. But remember, the bankers will be dealing with a multitude of problems. They will therefore be seeking asset sales or equity raisings to get a company off their problem list.
Finally, to the staff. Fairfax provides a good example of how not to undertake a cost cutting program. Fairfax certainly needed to undertake cost cutting and more may be required, but you also need to try to take the staff with you. Here are two tips that worked in previous crashes. Explain the relationship with the banks and what needs to be done. Start the staff conversation off with major cuts in the CEO and executive salaries, plus the ranks of executives. In the case of Fairfax, the editor of The Age resigned over the cuts. Whether that would have happened had the above strategy been undertaken we will never know.
Then of course there are the suppliers and customers. The suppliers may need to cut their prices and the customers have to be assured that despite the cost reductions there is an improved or maintained service. That requires some clever internal marketing.
Like other boards, Fairfax made a lot of correct calls and so is less dependent on the SMH and The Age in this downturn. They are not alone in being a bit slow to change gears and change stakeholder relationships. But with the shares breaching the $1.40 barrier, they are receiving a powerful wake-up call.