Today’s statement from Fairfax Media and CEO Greg Hywood is deficient on one major point: the question of impairment losses for the company’s still hard-to-believe $5.18 billion (December 25, 2011) of intangible assets.
There’s a lot of talk about the costs and job losses and a reading of the release would leave you believing the cost of about $235 million to sack 1900 staff and close the printing plants in Sydney and Melbourne, as well as resizing The Age and The Sydney Morning Herald and erecting paywalls around the two papers’ websites.
But the test of impairment for managements and boards is whether the asset values reflect the current and potential earning prospects, while having regard to market values for those assets (such as listed shares).
Fairfax Media lopped $649.9 million (most of which related to goodwill) from its intangibles in 2010-11 financial year. That was after it cut $477.5 million from the value of newspaper mastheads, radio licences and goodwill in the 2008-09 financial year. The charges in the 2011 financial year led to a net loss of $400.9 million, compared with a $270.3 million net profit in 2009-10.
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Today’s report should have included a view as to the likelihood of further impairment charges once the books for the June 30 year are ruled off (it’s just 12 days away). That would not have been too hard to mention, or provide an estimate.
There was just no reference to impairment in today’s statement, which under the heading “Strengthening the balance sheet” said:
Fairfax has executed a fully underwritten share placement for the sale of 59.4 million Trade Me shares to reduce its interest from 66% to 51%.
The shares are being sold at a price of $A2.70 per share and will provide Fairfax with approximately $A160 million of proceeds. This selldown is on an EV/EBITDA (2012F) multiple of 14.6x based on Prospectus forecasts, and compares with a price per share equivalent to A$2.05 at the time of the IPO of Trade Me in December 2011.
The selldown of Fairfax’s Trade Me interest will strengthen Fairfax’s balance sheet and is prudent in the context of the current environment and planned restructuring.
As a result of the sale, Fairfax will have net debt, excluding the consolidation of Trade Me’s net debt, of approximately $800 million.
Fairfax remains highly supportive of the Trade Me business and intends to retain a majority shareholding.
From the tenor of the statement, its quite clear the board and management hope the changes will allow the company to continue publishing its papers, especially The Age and the SMH on a profitable basis. With a eurobond repaid and about $800 million in debt, the company looks in a good position with more than $6.9 billion of total assets. But that figure is misleading. Time to take the axe to the balance sheet and resize it in the same way as the metro printing and publishing businesses are being downsized.
In other words, it has to be a dramatic number, $1 billion perhaps? The question is, can Fairfax do this and remain within the covenants on its existing debt, because any realistic impairment charge will produce a loss for the company. Operating earnings are falling (as the company revealed last week).
CLARIFICATION: Fairfax tells Crikey it has been “very clear” about its debt covenants. “There is no relationship between book asset values or impairments and covenant compliance,” a spokesperson said.