When the media cap doesn't fit

This time last year Fairfax stripped $2.8 billion off its intangible assets – which is mainly goodwill acquired as part of past business acquisition; since then we have seen significant impairment charges from APN News and Media ($638 million), News Corporation ($1.4 billion), Seven West Media ($288 million) and yet another writedown from Fairfax ($459 million).

The last time writedowns of this magnitude occurred was in the middle of the GFC – which saw News Corporation strip $8.4 billion dollars from the book value of its intangibles, as well as Fairfax, APN and Prime all acknowledging that their intangible assets were no longer worth what they previously claimed.

Intangible assets are covered by Australian accounting law in AASB Standard 138, and are defined as “an identifiable non-monetary asset without physical substance.” This can mean anything from goodwill to mastheads, patents, copyrights, customer databases, customer loyalty and market share. However, only intangible assets either wholly acquired as part of a past transaction or as part of a business combination can be recognised. Internally generated goodwill cannot be recognised as an asset, and internally generated intangible assets can only be recognised if they meet the ‘research’ and ‘development’ requirements of the standard.

The media sector globally carries a lot of its value as intangibles. Within Australia intangible assets make up a significant proportion of the overall assets of Southern Cross Austereo (intangibles represent 82.5 per cent), Fairfax Media (47.7 per cent despite the writedowns of the past two years), Seven West Media (74.6 per cent), APN News and Media (57.5 per cent) and Network Ten (64.3 per cent).

Compare this with the percentage of intangible assets for companies such as Telstra (21.2 per cent), Wesfarmers (10.3 per cent) and National Australia Bank (1 per cent), and it’s clear the media sector is carrying significantly more of its perceived value as intangibles.

While the book value of intangibles for Wesfarmers may represent just 10 per cent of its current market cap of $47.8 billion, and the $4 billion of intangibles in Telstra’s most recent balance sheet represent 6.6 per cent of its $61.5 billion, for a company like APN the book value of what it claims its intangible assets to be worth is a staggering 3.3 times the company’s current $228 million market cap.

And APN isn’t the only one carrying more value as intangible assets than what the market believes the company to be worth in total – Seven West Media’s $3.6 billion in intangible assets eclipses its current value of $2.5 billion, Southern Cross Austereo’s $2.03 billion of intangibles is higher than its $1.2 billion market cap. It’s the same for Fairfax ($1.44 billion in intangibles, market cap of $1.35 billion) and Ten ($1.08 billion in intangibles, market cap of $763 million).

Why do some media companies can have such differing opinions on the value of their assets to investors? And what has led to the dramatic writedowns we have seen in recent times?

Obviously domestic media companies have been hit by significant structural changes over the past decade that have changed irreversibly the area in which most media companies rely heavily upon – advertising. Print media has seen classified revenue move into the digital pureplays such as Carsales and Realestate.com.au, as well as into other more targetable digital channels such as Google and Facebook. On top of this circulation revenue has slumped.

The dominant asset within Seven West Media is the market leading Seven Network, however its $268 million recent writedown was related to an acknowledgment of a loss of value in its Pacific Magazines portfolio of mastheads, as well as the unsuccessful $40 million 2010 acquisition of group buying site Spreets. Fairfax Media’s recent $459 million writedown related mainly to its regional media assets (mastheads acquired as part of Rural Press), whilst News blamed ‘declines in advertising revenue and continued declines in the economic environment in Australia’ when disclosing the $1.4 billion dollar writedown of its newspaper units. Radio and TV have been relatively unscathed when it comes to intangible writedowns due to flat or low growth in recent times but if they are hit by the same reductions in ad spend that have hit newspapers and magazines, many will start to question the book value they attach to their intangibles.

So how is it that some media companies can have such differing opinions on the value of their assets to investors? It’s likely the market doesn’t see the same value in intangibles – mainly goodwill and masthead/media brand value – that the media companies believe may exist. It is also likely the market thinks some media companies have overpaid for some acquisitions or investments in recent times – something that the media companies themselves have also recognised to a degree over the past two years. Investors appear domestically much more bullish on the future economic potential of businesses like Carsales and Seek rather than the established brands they have unseated so dramatically. Internationally it’s a similar situation, with the likes of Google, Facebook and LinkedIn preferred by investors looking for future media bets.

Over the past four years we have witnessed large scale impairment charges across most media companies as they acknowledge the need to revise the book value of their key assets, yet the current share prices of all the main media players, combined with the sluggish advertising market and structural issues hammering print media in particular, suggest there will be more to come.