The time has come to think the unthinkable. News Corp. is on the ropes and taking a beating. Creditors mulling a $7.4 billion rescue plan could soon deliver a knockout punch.
But don’t blame the banks. Like a fighter still recovering from a binge the night before, News Corp. is inflicting most of the punishment on itself.
The latest revelation of News Corp.’s weak state comes in a Jan. 10 Securities & Exchange Commission filing, indicating that the company – which owns 20th Century Fox, Fox Broadcasting and a host of publishing interests – has wiped $6 billion from its balance sheet to comply with U.S. regulations governing the valuation of assets.
The write-down not only confirms the doubts of skeptics who had long believed that News Corp.’s book value was overstated, but puts the company in breach of covenants that require it to limit borrowings to 110% of shareholders’ funds. These have fallen from $8.7 billion in the last annual accounts to just under $3 billion. News Corp.’s borrowings are in excess of $8 billion.
Problem arose because News Corp.’s former statement of worth was included in accounts published in Australia, which has very relaxed rules about asset valuations, especially with regard to such “intangibles” as newspaper titles. Half of News Corp.’s former $20 billion book value was accounted for by intangibles.
In a controversial move, chairman Rupert Murdoch last year upped the aggregate value of those assets from $6.8 billion to $10.2 billion, without making it clear how much paper money was attached to each of them. Investors have been wary of News Corp. ever since.
The investors were right. In the SEC filing, News Corp. states the value of newspaper titles and related assets as $billion.
Also revised in the SEC filing are profit statements. In the year to June 1990, profits were reported as $264 million, compared to nearly $1 billion the year before. Now the 1990 figure has been reduced to $207 million.
The latest developments could reverse painstaking efforts to re-schedule News Corp. debts. It is believed that some of the 100 or more creditor banks involved have insisted on unanimous support if the plan is to proceed. Midland Montagu – which, with Citicorp, is leading the effort – admitted that there were “one or two” holdouts, but a spokesman expressed confidence that these would be “brought into line.”
The question remains: If News Corp. is already in default under existing terms, how can it expect to meet the much tougher conditions attached to the refinancing?
In the SEC filing, News Corp. admits that if the rescue package does not go through, the company’s “projected internally generated funds and available borrowing capacity under existing bank agreements will not be sufficient to satisfy significant loan obligations which mature through 30 June 1991 and significant costs associated with capital investments to be incurred through June 1991.”
Nearly $3 billion of the News Corp. debt is due for redemption by the end of June. The rescue plan would delay repayment of this and other debt, to a total of $5.4 billion, for three years. A further $2 billion would be retired in the interim. In exchange, the banks would earn one-time facility fees, success fees and higher interest charges.
If some of the smaller creditors now refuse to endorse the plan, News Corp. could seek Chapter 11. In that event, expect multibillion dollar asset sales – in excess even of the $2 billion of disposals to which Murdoch is already committed.
Further evidence of News Corp.’s low standing is that bonds issued by the company are trading at such a deep discount that they are producing annual yields of as much as 47%. That sort of return rate is normally an indication that the issuing company is about to go bust.