Nikkei’s Balance Sheet Disastrous after FT Acquisition

155.6 billion yen Goodwill is an Evidence of the Skinny Bride. How to Pay Down Government Debts?

May 20, 2016

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Shareholders with financial literacy must have been terrified. Goodwill suddenly appeared on the balance sheet of Nikkei Newspaper (“Nikkei”) was an eye-rolling figure. 11am of March 29th, Otemachi Nikkei Hall was hosting the shareholders’ meeting of Nikkei. Agenda included disposition of surplus, change of articles, and selection of directors, nothing irregular, and as pre-accorded, some union member made lukewarm questions, but it was evident that 155.564 billion yen goodwill related to the acquisition of the Financial Times (“FT”) was sitting on the balance sheet. As one can search from EDINET, the Nikkei’s operating report of 12 months to December 2015 stated that FT’s net asset was 15.7 billion yen, whereas the acquisition cost-- including advisor fee etc.---was total 168.6 billion yen of which 166,3 billion was acquisition value. In short, Nikkei paid more than 10 times of net asset for the purchase, and the balance was booked as goodwill. The number represents 55% of the Nikkei’s consolidated shareholders’ equity, or 51% of net asset. The footnote stated the goodwill will be amortized in 20 years straight method with Japan accounting standard, and the President Naotoshi Okada made it clear. That is, 7.8 billion yen per annum for 20 years, which would take toll on SG &A costs. Gross margin of Nikkei stands at nearly 40%, but heavy SG&A expenses generate operating margin of mere 5%. The amortization starts this fiscal year, as Nikkei regarded the acquisition as the year-end occurrence and only reflected at the profit and loss statements. Consolidated net profit of the last year was at 10.1 billion yen, down 1.1% from the previous year. We can hear creaking sounds on Nikkei’s finance.

FT’s PL was subsidized

The operating report shows sudden change in short term liabilities. Borrowing from Sumitomo Mitsui Banking Corporation (“SMBC”) increased from 1.82 billion yen in Dec 2014, to 126 billion yen (SMBC and SMBC Europe total) in Dec 2015. It seems SMBC made a bridge loan, which must have been restructured as long tem loan. Mr. Okada stated that the borrowing will be paid down in 10 years, which implies 12 billion yen pay down from net profit. He also said that the “interest burden is only 300 million yen per year”, which means interest coverage ratio is high, or interest payment relative to FT’s earnings would be low. Yet, the aggregate of debt payment and amortization reaches double the net profit.

Of course, if FT earns well, that would be fine. But FT as a business, if we set aside its brand, has total asset of 59.8 billion yen, turnover of 60.3 billion yen, and operating profit of 5 billion yen. It does not seem like a good business, or growing business. Pearson Plc, sold FT stake because it must had caused a conglomerate discount. On top of it, FT needs to pay more or less 2 billion yen of rent to Pearson-owned building, which was not liable before the acquisition. Well, 5 billion yen earnings level was that much subsidized from Pearson. As for operating margin, FT is a bit higher than Nikkei, but it’s small in size. FT’s operating profit needs 34 years to pay down the acquisition costs. Nikkei’s pre-depreciation operating profit (30 billion yen per annum) covers the acquisition with 4 years, but that wipes out new investments. Some shareholders stated opinion to sell subsidiaries such as a rating agency, or the TV Tokyo.

The director of finance, Kazunori Murakami, candidly revealed the source of long term funding for the acquisition. He replied; “we proposed an overseas development loan program of Japan Bank for International Cooperation (“JBIC”) in February, for 60% of the total, and the remaining debt borrowed from 5 banks, which means 3 mega banks and Resona Bank and Sumitomo Mitsui Trust Bank.” 60% of 120 billion yen means 70 billion. This proves FACTA’s initial report of September 2015 was true, which depicted one Shinzo Abe’s aid whispered to the prime minister that “we can buy the FT…..”, and suggested a possible financing scheme from JBIC or Development Bank of Japan.

The Nikkei tops dependent on government banks

Hiroshi Watanabe, the governor of JBIC, an ex-Ministry of Finance (“MOF”), is a long-lasting fan of FT. Senior MD of JBIC, Tadashi Maeda also played in past at political back scenes. Tsuneo Kita, the Chairman of Nikkei, and President Okada, were both correspondents covering the MOF. They must have asked the hobnobbing government bank people to lend. The other side of coin might be, that the private banks must have hesitated with Nikkei’s finance, and were content on junior role, 10 billion yen loan per bank, with the lead by the government bank, must have been judged safe. If Nikkei’s main bank being JBIC, Nikkei may be deemed as it sold consciences to the Abe Administration. On top of the two Abe-supporting papers, the rightist Yomiuri, and Sankei, the newspapers in Japan including the leftist Asahi, which experienced big drop in turnover due to “comfort women frame up”, are busy currying favor to the Abe Cabinet. Nikkei must have joined the bandwagon, with a prize of purchasing FT, who once wrote satirical article on Shinzo Abe.

Nikkei must bear burdens in return. It had no debts, with 130 billion yen liquidity. Shareholders’ equity accounted for 60% of the balance sheet. Comparable media firms would be limited to TBS or TV Asahi, from earnings level, cash flow generating power, asset size, and its contents. The two TV station companies are rated single A from R&I rating agency, and Nikkei is deemed similar, but with this FT acquisition, it is rated BBB with downward watch. If situation turns sour, it would be at BBB- a notch above “speculative”. Equity ratio used to be above 60% has now come down to 44%. Consolidated balance sheet and cash flow statement describe Nikkei generated 40 billion yen as a part of acquisition by selling securities, recovery of claims, and withdrawing cash and deposits. FT’s legacy costs, namely employee’s retirement liabilities added 25 billion yen to Nikkei’s liabilities, on top of the debt burden. The increased bonus liabilities on directors must be a consequence of higher bonus of FT. Such a fee discrepancy could be an origin of future conflicts. The big M&A won’t generates fruit, if capable correspondents and editors quit.

Okada cannot restructure NAR

Negative effect started to appear on the balance sheet. The currency rate; 185 yen/pound in the November 30, when the deal closed, has moved to 178 yen/pound. Minus 12.4 billion yen appeared on the “account for adjustment of forex translation”, and the currency rate moved negatively further. (152 yen/pound as of April 11). It looks like Nikkei does not hedge, so potential Brexit will take another heavy toll. The new bride, attracted by strong finance, is indeed very intellectual, haughty, but she is skinny, and may not devote.

In a meeting to explain the acquisition of FT to employees held in April 1st, Mr. Okada stated the contents of English-written Nikkei Asia Review (“NAR”), which is running 1 billion yen deficit, will be utilized in FT.com, an internet version. FT’s know-how on seminars will be co-promoted in Asia, and FT will be promoted in Nikkei marketing channel inside Japan. Synergy effect with NAR and FT is apparently limited in Asia, but he cannot shut down NAR, as it is his beloved brainchild. Nikkei will send FT an editorial board member with quarter century experience, and he is expected to write editorials. At the same time, further M&A will be pored jointly, and in Singapore, Nikkei and FT already cohabiting in a same office. But, we hear one Nikkei director stayed in FT, was doing nothing but playing golfs. As a result of winning lawsuit against Shukan Bunshun, a weekly tabloid magazine, the questionable female desk who had affairs with the top, was promoted to be the general manager of the Economics Department, starting April. On the other hand, managers implicitly tightened grips to employees by ordering “not to talk outsiders on the FT”.

Yet, when FT knows what’s inside of Nikkei’s purse, the honeymoon period may get short. Some rumor by insiders had it: “Nikkei may adopt IFRS to avoid goodwill write-off”, or “It might sell FT in half the price in 3 years”……….