STAGGERING: Fairfax post massive net loss $365 million, on verge of collapse

fairfaxmassacre

The publisher of left-wing newspaper The Age, Fairfax Media is on the verge of financial meltdown after announcing a $365 million net loss for the first half of the financial year.

The company was forced to slash $447.5 million from its balance sheet valuations of the businesses they own, including dubiously over-valued assets like The Age’s masthead.

“They’ve borrowed many millions on The Age and (Sydney Morning) Herald’s mastheads, which we doubt they could get anything much for in a firesale. The situation is really quite desperate for them,” one industry observer said. “The assumptions underlying loans to Fairfax depend on classifieds revenue and that it is dying in real estate, autos and even employment, so how much longer can the company survive?”

The write-downs of asset valuations make for big headline numbers but of themselves don’t make a big direct impact on the business (at least until it comes time to refinance).

What is crucial for the company’s survival is complying with the covenants in the loan agreements between Fairfax Media’s banks and bond-holders. VEXNEWS understands that there are a number of different covenants but the key ones are that operating profit must be at least 3.25 times net interest and that net debt must not exceed profit by 4 times.

Fairfax is on the verge of liquidation because it is not that far off exceeding those ratios that would see banks/bond-holders seize control of the company.

Even on Fairfax’s own optimistic projections in the chart below, it is not that far off breaching covenant limits.

debtcovenant

However, as the Australian reported last week:

On Goldman Sachs JBWere numbers, Fairfax’s operating profit to interest ratio for 2008-09 is estimated to be 3.6 times. The net debt to operating profit ratio is estimated at 3.5 times.

Margin of safety? Bugger all. If the recession goes deeper or longer than hoped, there is no doubt that Fairfax Media will be forced – at the very least – to renegotiate with banks/bond-holders. In the worst case scenario, those who’ve lent money to this debt-fuelled troubled empire will demand their money back and appoint a liquidator to sell it up piece by piece. If the situation continues to deteriorate, the Age could well be for sale within a year or two.

Why has it got so bad?

Partly, it’s cyclical. Companies are cutting back and many cut their advertising spend. That’s hurt everyone in media.

But what’s dragging down Fairfax Media is the woeful performance of its metropolitan titles, The Age and Sydney Morning Herald. No-one expects them to be doing better this time next year.

Their earnings before interest, tax etc. crashed 23% to barely $70 million for the half, the lowest number its produced in a very long time. By contrast, those dinky boring local and regional newspapers brought across under Rural Press made a lot more delivering $102 million. They were down but within industry norms. It’s the Age that is dragging them all down.

The Rural Press lads – especially their biggest shareholder John B Fairfax – must be kicking themselves for agreeing to merge with The Age and SMH publisher Fairfax Media. It’s a mistake that has cost their shareholders billions.

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7 Comments

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7 responses to “STAGGERING: Fairfax post massive net loss $365 million, on verge of collapse

  1. thylakoid

    Andrew. I am a recent resident of Melbourne. But I am fascinated by such a suddden demise of The Argus all those years ago. What were the causes? And might the same happen to The Age?

  2. Anonymous

    How much for Lawrence Money’s computer you reckon?

  3. Whitlamite

    What I wanna know is how I can help to finish the lunatic bastards off

  4. Splish

    An attempt at change management would have helped the merger. An attempt at strategy wouldn’t have been a bad idea. A few less senior management fat cats was called for long before now. Funny how Captain Kirk was not allowed the excuse of Global recession and credit crunch when responding to falling profits. Funny how his
    diverisification into online has been the only winner.

  5. Age insider

    Online isn’t really a winner, theage.com.au might appear profitable how profitable would it really be if they paid for the content they get from the Age. It’s time this revenue went to the newspaper that produces it so a real accounting of the newspaper’s profits can be done.

  6. Splish

    I agree Age insider. My only point was Kirk was responsible for the diversification into online and other strategys. So why was Kirk banished? Since he left The share price has plummeted further, along with profits and 550 staff. I think the board had tunnel vision and JB would be wondering if they chose right.

  7. Tel

    Newspapers are not going to survive in their paper format. That much is plain to everyone (except the newspaper people).

    Fairfax had a nice distribution network going with their key newsagents and everything running smooth and tight, but that’s all yesterday. It’s gone, they just don’t accept that what used to work doesn’t work anymore.

    So it’s online or die, simple as that. Having made that decision the next question is whether to have a closed subscription site or an open site payed by advertising (or a bit of both).

    If you have a closed site then you had better deliver enough content to make people want to pay. Quality content. I doubt Fairfax could deliver.

    Running an open site is easier, you can deliver any crap, just enough to keep people glancing at it. But, then so can anyone else deliver this crap (and they do). Advertisers are moving their money to google and I’ll tell you why in simple terms, a tiny newspaper ad costs hundreds of dollars, spend the same money on google and you get a better target market, more responses and you can control your spend in real time.

    The cheese has moved. That fine paper distribution network of yesteryear just went obsolete.

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