Probably the most encouraging feature of this year’s review of the balance sheet vulnerability of publicly listed marketing companies is the fact that many of the companies involved have already taken steps to strengthen their financial position.
However, the two companies with the poorest scores at their last balance sheet dates looked uncomfortably dependent on debt and on being able to avoid any impairment in the value of past acquisitions. Those companies were Media Square and Progressive Digital Media Group.
The Marketing Services Financial Intelligence vulnerability ratio combines two measures that are particularly important to “people businesses” like marketing agencies. One of the measures is the “gearing” ratio of net borrowings to shareholders’ funds – the extent to which the company’s capital base is dependant on interest-bearing loans that will have to be repaid, relative to shareholders’ funds that do not have to be repaid.
The second measure examines past acquisitions and the extent to which shareholders’ funds have been invested in the intangible value of the acquired companies’ future profit-earning potential, rather than in readily realisable tangible assets. That intangible element comprises mainly “goodwill”. A decline in the performance of such acquisitions may lead to a write-down of the cost of goodwill – called an “impairment provision” – thereby reducing the value of shareholders’ funds relative to the amount of the company’s borrowings and potentially exposing the company to pressure from its bankers.
The chief executive of Media Square has made it clear that he doesn’t want anything written here about his company that could be construed as unflattering. So readers will have to rely on the picture, which probably needs no elaboration anyway.
However, it would be interesting to hear how Media Square’s attempts to find a merger partner or outright buyer are progressing. It can’t be easy, as few potential investors would wish to inherit the company’s debt mountain. And the company’s bankers have doubtless slapped a mortgage on almost every tangible asset down to the last paper clip, so they will not be rushing to write off any of their loans.
The scenario at Progressive is very different. Almost all of the debt has been provided by the controlling shareholder Mike Danson and he is unlikely to seek repayment of the loans due on demand for as long as the business flourishes. (Even the loans that are theoretically repayable by instalments are subject to a proviso that the repayments can be reduced or avoided if the company can show it needs the capital in the business.)
However, the report also points out that the funding structure is less favourable to creditors than would be the case if some of the loans were converted into share capital. That may not suit Danson’s personal financial agenda, but it’s something that suppliers and creditors could reasonably agitate for.
Bob Willott is editor of “Marketing Services Financial Intelligence” at www.fintellect.com