Monday, January 19, 2009

Gannett's goodwill glut

Apropos of some questions from a reporter for the Weekly Independent in Lafayette, Louisiana, who was working on a story about impact of cuts and furloughs on Gannett's local paper there, the Daily Advertiser, I spent some time today poking around in Gannett's SEC filings.

The questions had to do with the level of goodwill carried on Gannett's balance sheet. A story on Bloomberg had pointed out that Gannett ranks tops among S&P 500 companies whose goodwill exceeds their market value: it carries $8.48 billion in goodwill (and that's after writing off $2.49 billion of it in March), against a current market cap of $2.46 billion. So don't be surprised if the company's annual report, due at the end of February, shows it is reducing goodwill some more.

What practical effect would this have? None, as far as ongoing operations are concerned, except this: Gannett has in place $3.9 billion in untapped lines of credits, expiring in 2012, "which provide back-up for borrowing and for general corporate purposes." In better days, such lines would provide flexibility in case the firm wanted to make an acquisition and had to act quickly, but they also serve as a rainy day reserve, to tide the company through a revenue downturn.

But here's the catch, as described in the company's 2007 annual filing: "
The revolving credit agreements in place at Dec. 30, 2007, contain a single restrictive provision that requires the maintenance of net worth of at least $3.5 billion. At Dec. 30, 2007, net worth was $9.0 billion." That net worth is the "stockholders' equity" on the balance sheet—the net of all assets, including goodwill, minus all liabilities. If goodwill is written down, net worth decreases. Because of the March writedown, net worth has already dropped from that 2007 year-end figure of $9.0 billion to $5.55 billion as of Sept. 28.

The goodwill valuation implicit in Gannett's stock price is about $5.4 billion, or $3.0 billion less than what's on the books. Should Gannett write off $2.1 billion or more, its net worth drops below the restrictive provision on their revolving credit, erasing its borrowing ability. Given that the SEC and auditing rules require companies to test goodwill valuations against market values, in an environment where there are virtually no buyers for newspapers anywhere, it seems likely Gannett will have to take that step.

This helps explain the drastic and urgent cuts Gannett has been imposing on its operations (and makes a dividend cut likely, as well). With no borrowing capacity, and no other reserves, the company must maintain a positive cash flow at all costs, or it will join other newspaper outfits on the penny-stock lists.

Can Gannett keep its head above water? That seems likely, as well. For the first 9 months of 2008, its revenues were down 9.2 percent versus the prior year. For the year, the downturn might be in the 10 percent ballpark. Gannett could weather a 10 percent downturn for all of 2009 with cash to spare, and wouldn't run into real trouble unless the revenue hit became 20 percent or more. This puts it in a far better position than most of the other publicly-traded newpaper firms, which would run into trouble in the 10 to 15 percent range (and some of which, like the New York Times Company, have 2009 debt refinancing to contend with, as well).

Still, look for Gannett to explore any other avenue it can to conserve cash and preserve its options, including a renegotiation of its revolving credit terms.

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