Is Goliath in the throes of a financial crisis? David was not required to slay this Goliath. Goliath tripped on its own. India’s biggest media entity is all set to declare a loss for the first time in its long and illustrious history. Bah, what rubbish? Yes, my sentiment exactly, but cold hard nosed reality is what it is. So, why have things come to such a sorry pass? It was unthinkable till even a year ago that the group which had established the media multiplier theorem could be on skid row.
In fact, Goliath faces a major crisis if equity is not raised soon. That is perhaps the most damaging indictment of how things have gone from good to worse in next to no time at the media conglomerate. A conglomerate, which was feared and despised for its battle plans and blueprints. A conglomerate, which had carved a large area of influence across the country with leadership positions in major swathes.
Goliath now needs to raise funds quickly is the clarion call. Whatever happened to all the reserves and surplus that were accumulated over time? The panacea is to sell shares owned by Goliath in a large private sector bank (received in lieu of a transaction done some years ago), as also hawk liquid investments from the Private Treaties (barter deal, where company gets advertising inventory in exchange for equity, essentially a cash less transaction) portfolio (even if at a loss). Moreover, the dark and dank outlook includes renegotiation of private treaty deals to lessen market impact and even reversing deals in cases where investment upside looks unlikely.
These private treaties were practically anathema to the editorial top deck, leading to conflict situations and even resulted in turnover. Private Treaties were foisted on the editorial and affected the morale of the personnel. The irony is that the cash impact was only to the extent cash taxes are paid on revenue recognised. A Rs 2,700-crore portfolio has estimated market value of merely Rs 1,300-1,400 crore. Furthermore, there is a major accounting loss when marked to market. The entire financials, if restated without Private Treaties, will show massive erosion. Yet, they were persisted with and they seem to have brought the company to ruin. Am I painting a very grim scenario? Have many of the lurking suspicions about the entity now come true? The answer to both posers, unfortunately, is in the affirmative.
Now, let us break down the lowdown on the showdown. In July 2008, the company posted operating revenues of Rs 3,316 crore, this year it is expected to register Rs 2,500 crore. Last year, newsprint cost alone was Rs 1,185 crore, this year with prices cooling down, it is down to Rs 893 crore. Similarly, employee cost is down year-on-year from Rs 480 crore to Rs 430 crore. Maybe due to layoffs and major pay cuts across the board, including lopping of variable pay. Other expenses were Rs 1,000 crore last year, down marginally to Rs 900 crore this year. Remember, all these figures for this year are estimates. Incidentally, the company follows a June 30 financial year. EBITDA (Earnings before Interest, Depreciation and Amortisation) from operations last year was Rs 651 crore, down to Rs 277 crore this year in provisional estimates.
Other income last year was Rs 259 crore, while this year’s estimate is Rs 100 crore (after taking out profit on sale of a retail venture to a consumer durables major) and other investments. Now comes the intriguing part. Last year, depreciation was negative – Rs 195 crore, which is down to – Rs 275 crore. Yes, the company is in a major capex mode and between the private treaties and expansion mode, it is well and truly a double whammy. The next post will thus be self explanatory – interest cost has mounted from Rs (32 crore) to minus Rs 250 crore. And therein lies the rub for profit before tax, which was Rs 683 crore last year will be negative minus Rs 148 crore, the first ever loss in Goliath’s history. Now let us also understand that these are estimates, but scary nevertheless. For they are estimates about the first among equals – Goliath. Internal estimates are never wrong, for hard number crunching is done and not back of the envelope calculations. This is the genuine McCoy. And that is what makes it all the more astounding.
It is obvious that many of the punts have gone wrong, namely Private Treaties and all new economy businesses. Investments in radio, Internet and telly, as also in financial services companies. All these chickens have come home to roost. The consolidated net investments in new media are equal to the entire net worth of Goliath, representing the re-investment of entire profits of the print business over the decades. Till date, Goliath has back of the envelope invested Rs 1,700 crore on new media investments. If one hears of wage cuts and other such dramatic measures, it could well be because the finances and resources for what was once a remarkably cash rich company are stretched too thin. One also hears that some of these weighty capital expenditure plans will only break even by 2016-17. Dang! What is perhaps most significant in this saga is that the virtual erosion in finances and resources has partly come from the flawed Private Treaties model. The advertising for equity barter worked like clockwork when the markets were unidirectional and more or less secular for about four and a half years. When the bottom fell out of the market due to bulge bracket FII and hedge fund selling, the wheels came off the private treaty bus.
The steep falls in financial parameters over a one-year period are particularly worrying, even irksome. In July 2007, total debt was Rs 135 crore, enlarged to Rs 1,351 crore in July 2008. Total liabilities have ballooned up to Rs 5,613 crore in July 2008 from Rs 3,575 in the previous year. On the investments front, liquid investments are down from Rs 193 crore in July 2007 to Rs 130 crore in July 2008. Then comes the veritable blinder in this mix – advertisement for equity investments in July 2007 were at Rs 1,313 crore, which shot up to Rs 2,729 crore in July 2008. Loans and advances to subsidiaries were also up in equal measure from Rs 468 crore in July 2007 to Rs 1,088 in July 2008.
Now, finally let us look at a three-year horizon – sources and uses of cash between 2005 and 2008.
Cash from operations – Rs 4,000 crore
Sale of Liquid Investments – Rs 1,000 crore
Increase in debt – Rs 1,350 crore
Total cash available – Rs 6,350 crore
Capital Expenditure – Rs 2,000 crore
Private Treaties – Rs 2,700 crore
Investments in subsidiaries – Rs 1,700 crore
Total cash used – Rs 6,400 crore
I don’t need to be a human clone of Warren Buffet to explain what has gone wrong here. While income from operations was a robust Rs 4,000 crore, Rs 1,350 crore of debt was taken on the books by Goliath. It was the first time that Goliath had ever taken net debt. Moreover, Rs 1,000 crore of liquid investments were hawked off, wiping out the entire liquid portfolio. Ironically, in this double barrel of Private Treaties and New Media investments, two siblings as different as bread from syllabub are involved. The sum and substance of this tale of woe is that since the media entity is cash strapped, it is trying to dilute equity in various subsidiaries, a hitherto unknown concept in the Empire. Times are tough, valuations are aplenty and bargain basement cheap. Will somebody bite the bait?
(Sandeep Bamzai is a well-known journalist who started his career with The Statesman in Kolkata in 1984. He has held senior editorial positions in some of the biggest media houses in three different cities - Kolkata, Mumbai and New Delhi - with The Indian Express, Illustrated Weekly, Sunday Observer, Dalal Street Journal, Plus Channel where he ran India's first morning business show on Doordarshan, The Times of India Group, Business India, Hindustan Times and Reliance Big Entertainment. Starting his career as a cricket writer, he graduated to becoming a man for all seasons under Pritish Nandy, who he considers as the premier influence on his career. Since he studied economics at Calcutta University, Bamzai decided in 1993 to branch out into business and financial journalism. Familiar with all three media, he is the author of three different books on cricket and Kashmir. The views expressed here are of the writer’s and not necessarily those of the editors and publisher of exchange4media.com.)