With its share price sliding to record lows, Fairfax Media is now in the invidious position of having the most wildly optimistic balance sheet of any ASX 200 company.
When its latest statutory earnings
were released on February 23, page 9 revealed
that the dominant item on the balance sheet was $5.1 billion worth of intangibles. Note 7 on page 20 of the interim report
provided the following breakdown of those intangibles:
- Mastheads and trademarks: $3.21 billion
- Goodwill: $1.8 billion
- Radio licences: $121 million
- Software: $64.5 million
- Customer relationships: $9.5 million
Unfortunately, Australia’s accounting regulations don’t require any specific disclosure or breakdowns within an asset class.
The specific intangible book value of The Age
, The Sydney Morning Herald
or The Australian Financial Review
are not disclosed, although last year’s annual report
does provide a more detailed breakdown on page 68.
For instance, investors are told that the goodwill allocation for Australian regional newspapers is $404 million, plus a hefty $1.09 billion for trademarks and mastheads.
Fairfax’s big spending ways in New Zealand are also evident with $559 million in goodwill for "New Zealand Online", which relates to the Trade Me
acquisition. There is an additional $733.5 million allocated to trademarks and mastheads for "New Zealand Media", which is presumably the old News Corp publishing assets that were acquired for $1.1 billion in mid-2003, just a couple of months after Ron Walker and Roger Corbett joined the board.
With newspapers in structural and precipitous decline courtesy of the internet, Fairfax Media is now only capitalised at $1.53 billion, based on a share price of 65 cents.
So how on Earth can the Fairfax directors along with the auditor, Douglas Bain from Ernst & Young, continue to claim the company has net assets of $4.735 billion? The discrepancy has now blown out to a record $3.2 billion.
You can see the Douglas Bain sign-off on page 32
of the half-year profit, although he does stress that only the end-of-year accounts are formally audited.
Bain replaced EY partner Christopher George, who completed his five-year tour of duty as Fairfax auditor with last year’s annual report. I asked George to justify the valuation of intangibles at Fairfax’s 2008 AGM but chairman Ron Walker wouldn’t let him answer and then CEO David Kirk claimed there were sufficient cash flows.
Which brings us to yesterday’s board shuffle at Fairfax. The world’s richest woman, Gina Rinehart, was rebuffed and instead chairman Corbett announced that former IBM Australian CEO Bob Savage was retiring and would be replaced by James Millar, the former CEO of Ernst & Young in Australia.
This upset Australia’s most effective activist institutional shareholder, Simon Marias, who told The AFR
key Fairfax investors should have been consulted first. Rinehart is also presumably upset to have this appointment happen on the same day a Fairfax publication, BRW
, had her hostile unauthorised biographer, Adele Ferguson, declare she was somehow worth $29 billion.
Meanwhile, back on the Fairfax board, it is worth noting Savage wasn’t on the three-person audit committee
which comprises Corbett, Peter Young and chair Linda Nicholls, who has only been a Fairfax director for two years.
As a professional accountant, Millar would ordinarily be a good candidate to chair the Fairfax audit committee. He holds that position on the Mirvac board
. Then again, maybe Fairfax will seek to avoid the awkward situation of current Ernst & Young audit partner Bain debating intangible write-downs with his former boss.
Ultimately, it is the full board that signs off on the accounts, so it will be very interesting to see what collective decision the board and auditor come to in the 2012-13 results, which are due for release in August.
For mine, it is pretty clear that Fairfax should clear the decks by writing down its intangibles by at least $2 billion. After all, this is what they said on page 20 of the interim results
about the way valuations are conducted:
"The group tests annually whether goodwill and intangible assets are impaired ... in light of current circumstances."
Surely, with the rise of Facebook, Twitter and Google and the crisis engulfing dead tree publishing the world over, it is time to bite the bullet and adopt some more realistic valuations in the annual report.