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.
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.