O'Reilly's disappearing debt trick

Friday 9th November 2001

Sir Anthony O'Reilly, Ireland's answer to Rupert Murdoch, has always been more adept at financial engineering than he has been at squeezing profits out of the notoriously tricky media sector.

So it's unsurprising the money-go-round arrangements for the proposed merger of our second-largest newspaper group, Wilson & Horton, with his 40%-owned Australian outfit APN News & Media should be less than crystal clear.

The impression given by APN's documentation of the $1.2 billion deal - which has still to be ratified by APN's minority shareholders - is that the merger is pretty straightforward.

APN will pay $A809 million ($1.01 billion) for W&H, which Dublin-based Independent News & Media bought four years ago for about the same amount.

The purchase price will be financed through the issue of $A250 million of convertible notes, of which INM will contribute half; a placement to INM of $A100 million worth of ordinary shares; a five-for-nine rights issue to raise $451 million, of which INM will kick in between $A178 million and $A202 million depending on the take-up from other shareholders; and $A42 million of additional bank debt.

INM's APN holding will rise to a maximum of 45% and its contribution will be between $A403 million and $A427 million.

With the addition of the $A809 million purchase price for W&H's equity to the New Zealand publisher's liabilities of $A429 million, the deal values W&H at $A1.24 billion, implying a reasonable-sounding multiple of projected 2002 earnings before interest, tax, depreciation and amortisation of 9.6.

The sale will ease the pressure on INM's heavily geared balance sheet.

The Irish group has debt of e1.56 billion ($3.3 billion) and shareholders' funds at the June balance date of only e305 million ($655 million), giving an unhealthy ratio of debt to debt-plus-equity of 84%.

Since then INM has lifted the burden somewhat with a e105 million ($226 million) European share placement. As it will rake in $1.55 billion for W&H while funding only a maximum of $534 million of APN's acquisition cost, the deal should restore O'Reilly's balance sheet to something resembling commercial normality.

The same cannot be said for APN, which is raising a fresh $A950 million of debt. Its formerly modest gearing ratio will shoot up to a pro forma 88% while interest cover (the number of times net earnings cover the interest bill) will dive to 3.2 times.

But is all quite as it seems? Those who can remember Brierley Investment's dawn raid on W&H and the subsequent sale of its 23% stake to INM will recall the Irish were so stretched at the time they had to take vendor finance from BIL.

Having secured their prey the Irish cash-stripped the chronically undergeared NZ Herald-owner, dressing up its balance sheet by revaluing the newspaper mastheads from about $50 million to $880 million.

The missing equity was replaced by a loan to W&H from INM subsidiary INM Finance. At W&H's December balance date this was shown as $1 billion of the total term debt of $1.15 billion.

Of this, $182 million is owed by INM to W&H's former shareholders, who have preference shares redeemable for cash or INM shares.

This gives rise to an obvious question. If APN is buying 100% of W&H and is taking on $A429 million ($536 million) of its debt, and W&H's total term debt less the preference shares is $968 million, what has become of the remaining $432 million?

Shoeshine's search for the answer has not yet borne fruit.

W&H chief financial officer Phillip Eustace was presumably too busy to return Shoeshine's call.

His boss-to-be, APN chief executive Vincent Crowley, got back on the phone within a couple of hours but was unable to help. APN, he explained, was buying the Wilson & Horton Group, one tier down from the holding company, Wilson & Horton Holdings.

Inquiries about W&H Holdings' finances would have to be addressed to INM's chief financial officer, James Parkinson, in Dublin.

A late night call to Dublin got no further than the switchboard. Mr Parkinson's secretary, the switchboardiste confided, was not at her desk, so a message could not be left.

And no, Shoeshine couldn't have her email address or Mr Parkinson's; that was forbidden by company policy.

Nor did an email to the generic enquiries address on INM's website yield any response.

Fearful he might have overlooked the obvious, Shoeshine dragged his bulging W&H file across town to his beancounting buddy, a partner in a Big Four firm.

No, his mate opined, there was no obvious way to account for the missing millions.

Of course they might remain as W&H Holdings debt owed to INM Finance. But in that case INM will eventually be making a big write-off, as W&HH will have no assets with which to generate cash to service and repay its debt.

Shoeshine is sure there is a reasonable explanation and looks forward to hearing it in due course.

In the meantime, it's less than clear APN has got itself such a great deal.

W&H's December balance sheet shows investments of $78 million, including $60 million for its one-third stake in The Radio Network.

Fixed assets were $309 million, the lion's share being the printing presses, land and buildings; goodwill added $101 million and "mastheads and publishing titles" $866 million.

All up, $1.35 billion, for which APN will pay $1.55 billion, including the W&H debt it's taking on.

On the international scene the battle still rages between beancounting bodies on whether companies should be able to include intangibles such as mastheads on their balance sheets and whether, if they do, those assets should be amortised like everything else.

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