The Monday business pages are traditionally the hardest to fill, so The AFR has belatedly hit upon an issue for this morning’s front page that has been around for weeks — the coming avalanche of write-downs.
On December 23, this Mayne Report edition named 15 public companies that were claiming to have net assets which were at least $1 billion above the then market capitalisations and were prime targets for big write-downs.
Business Spectator‘s Robert Gottliebsen last week pointed out that this was a global trend after Goldman Sachs analysts Abby Cohen predicted big write-downs on the $US2.6 trillion in goodwill sitting on S&P500 company balance sheets.
However, not all Australian balance sheets are inflated. Whilst Wesfarmers is the worst offender as it claims to be worth $19.6 billion against a market capitalisation of just $11 billion, Woolworths is capitalised at $32.2 billion yet only claims it has net assets of $5.6 billion.
The difference can be explained by the fact that Woolworths has self-generated its own goodwill with magnificent organic growth, whilst Wesfarmers paid a ridiculous $19 billion for Coles when it would today be valued at $10-15 billion.
It was a complete joke for Wesfarmers to come out last week and flag only $150 million in writedowns. If its board and management were being honest with the market, they would write Coles down by billions.
Wesfarmers is audited by Sean Van Gorp from Ernst & Young. If auditors were worth their millions, this is where the likes of Van Gorp would step up and insist on the write-down in the Wesfarmers half-year result due on February 19.
If Wesfarmers did write down Coles by $5 billion then CEO Richard Goyder’s position would be untenable.
The Rio Tinto directors will be considering exactly the same issue as they contemplate writing down the $US38 billion Alcan acquisition, which is undoubtedly the biggest takeover disaster in the history of Australian listed companies.
Rio Tinto CEO Tom Albanese and finance director Guy Elliott should both be out of job regardless of balance sheet values and let’s hope new chairman Jim Leng performs some swift executions once he takes charge after the Sydney AGM on April 20.
This list demonstrates how it is usually new CEOs who insist on writedowns in an attempt to paint the last guy black. Therefore, don’t be surprised if new Fairfax CEO Brian McCarthy does this to David Kirk and hacks into Fairfax’s $6.3 billion in goodwill on the balance sheet, although it would embarrass chairman Ron Walker and audit committee boss Roger Corbett, the two biggest backers of Kirk.
Fairfax is now one of 11 Australian companies which are trading at discounts to book value of more than $2 billion.
The other 10 are Babcock & Brown, Babcock & Brown Infrastructure, Centro Retail, Centro Properties Group, Goodman Group, GPT, Mirvac, Macquarie Airports, Macquarie Infrastructure Group, Wesfarmers and Westfield.
So far, only Babcock & Brown has admitted it will bring out the axe and join this list tracking the biggest declared losses in Australian corporate history. Who else will join the club over the next six weeks?