May 26, 2014

Why cutting jobs won’t save Ten

Ten can't keep going on like this - impairment tests and a big loan repayment due in a few years mean it needs a stunning turnaround to survive, writes Glenn Dyer.

The embattled Ten Network has been cutting jobs to try to staunch the bleeding as revenues slump, but it won't be enough to save the network. With the same collection of duds and moderate performers in the schedule, Ten faces months of continuing revenue pressures. It needs hit programs to arrest the slide in audience numbers and reassure investors and advertisers that it is still in business. But even if it does that, Ten will still face more hurdles. Once the company's financial year ends in August, the board meetings following will have to test the value of the company's assets and their ability to continue generating returns for the company -- that is, conduct impairment tests. Ten conducted such a tests in early 2013, and the result was write-downs of more than $292 million in the value of the company's TV licence in the 2012-13 interim result, and the subsequent after tax loss of $284 million. These tests are required annually and at other times if the board thinks the company's assets -- organised into what are called cash generation units  -- are likely to underperform. If there is no impairment, Ten's board will be under pressure to explain the reasoning, given the weakness seen so far in 2014. The 2012-13 annual report describes the impairment process:
"The consolidated entity tests annually or when circumstances indicate impairment, whether indefinite lived intangibles and goodwill has suffered any impairment."
That is done according to a set of assumptions on revenue growth, the performance of the economy and discount rates/interest costs. The impairment in early 2013 was clear-cut; this time around it will be less so. Ten has intangible assets of $785 million -- the value of its TV licences -- which is its only long-term asset of any significance. It has program rights and inventories of $230.6 million (up just over $3 million on the first half of the previous year), which are short-term assets. At the moment the value of those assets is questionable because of the weak ratings and fall in ad revenues, which reduces the value of not only the TV licences, but the program rights and inventories. The impairment test this year will look at the recent performance of the company and whether it is likely to continue. The TV ad market is stronger than in early 2013 when Ten reported a fall in revenue. The interim report this year said there was a 4.4% rise in TV revenues, but that was bolstered by the Big Bash cricket and the Sochi Winter Olympics. Sochi, needless to say, won't be happening next year. Ten's problem is that revenues have fallen since the February 28 balance date and directors will have to be reassured this has stopped, and that ad sales income will rise in the coming year. On top of the revenue weakness, Ten has chewed up at least $55 million of the up to $200 million covenant light loan from the Commonwealth Bank, according to the interim financial report. That was used to repay loans, and yet the company's debt at February 28 was around $35 million. Under the terms of the loan Ten is spared the need to pay interest and the guarantee fees to the big shareholders (James Packer, Bruce Gordon and Lachlan Murdoch) who have supported the loan. That means in just over three years' time, Ten will have to find upwards of $200 million or more to repay the CBA and the big shareholders. That means if it survives until then, it will have another enormous problem to confront. If there is no improvement in its financial standing, directors will not only have to conduct the usual impairment test, but make a decision as to whether the company can meet its debts as and when they become due. That question may come a year earlier if Ten's trading position is not significantly stronger.

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