CLOSE-UP: LIVE ISSUE - CREDITWORTHINESS. Supergroups stir credit worries in media owners

Getting the gearing right is half the solution for global groups, Bob Willott writes.

If anyone wondered why the TV companies were getting agitated about the creditworthiness of the media agencies owned by the multinational groups, they should look no further than the latest Interpublic announcements.

David Bell knew he was taking on a tough job when he became the chief executive of Interpublic earlier this month. Indeed the group's bankers have given Interpublic an ultimatum to raise $400 million by selling off assets or issuing new capital by mid-May. Even a fall-back 12-month financing arrangement made with UBS Warburg has been amended to require the group to make a new capital issue.

If the banks are worried, why shouldn't the UK TV companies be worried too? One argument in Interpublic's defence might be that its main UK media buying agency, Initiative Media London, had met all the prescribed creditworthiness tests, but even that defence would have failed at December 2001. Its shareholders' funds equity exceeded the required £1 million, its net current assets were positive, it had no bank borrowings (so its debt/equity ratio was better than the required 1:1), but sadly its pre-tax profits had slipped below the £1 million benchmark. Even so, Initiative's balance sheet looked better than many of its rivals.

The worry for media owners is not so much about the individual buying agencies, but about their owners. For example, at December 2001, Initiative Media London owed more than £5 million to other members of the group. If the Interpublic Group were to collapse, the receiver would pounce on Initiative to recover the debt and probably grab all its spare cash. So it's understandable that media owners insist on the entire Interpublic Group meeting their creditworthiness tests also. And that's why the TV companies are feeling anxious.

Not only would Interpublic fail those tests in a big way (see table 1), but all of the other global players would fail them as well (table 2).

So the TV companies have had to obtain alternative security over the years - security often in the form of escrow accounts into which client media money was paid but which are now considered to be an inadequate solution.

Bank guarantees have also failed to provide sufficient comfort.

It is hard to dispute the wisdom of the main creditworthiness tests, or their application to the global groups rather than individual agencies alone. To have a surplus of net current assets - in other words, to avoid owing more in the short term than the company can satisfy from its bank balances and the collection of debts from clients - seems immensely wise.

To owe less to bankers than has been invested by shareholders is also common sense. For the company's "gearing" (or debt/equity ratio) to get higher than 1:1 poses a threat to solvency if cash flow is insufficient to repay the bankers on the due dates, not to mention the impact in interest charges.

But some groups may baulk at how the media owners calculate the amount invested by shareholders, a calculation that adversely impacts on two of the credit tests. Instead of using the balance sheet amount of capital and retained profits, they insist on deducting everything ever spent on goodwill and other "intangible" assets. And, as almost everyone in the industry knows, the acquisitive global players have paid enormous amounts for goodwill.

The attitude adopted by media owners is that goodwill has no readily realisable value (unlike property or trade debts, for example). That may be true in a number of cases where acquisitive companies have paid far too much for their prey, but to treat all goodwill as worthless seems rather harsh.

Even if a more lenient approach had been adopted towards the treatment of goodwill, most of the global groups would still have failed the creditworthiness tests last June. Omnicom, Interpublic, Publicis and Aegis had debt in excess of shareholders' funds.

Only Publicis, led by its chairman, Maurice Levy, and Havas would have passed the net current asset test at that time and who knows what has happened since Publicis bought Bcom3?

If the outcome of the argument between TV owners and agencies results in new arrangements that affect the interest earned on clients' cash, either buying agencies' profit margins will be eroded or the clients will have to pay more.


31 Dec 01 30 June 02 Required

pounds m pounds m

A Shareholders' funds (share

capital and retained profits) 1,161 1,369

B Intangible assets

(goodwill, trademarks, etc) 1,941 2,134

C Equity adjusted for

credit assessment (C=A-B) -780 -765 £1m

D External debt (net of

any cash balances) 1,249 1,524

E Debt/equity ratio (D/C) no equity no equity <1:1

F Net current assets

(current assets less

current liabilities) -49 -70 >£1

Source: Marketing Services Financial Intelligence.


Company Positive net Shareholders' funds Debt/equity ratio

current assets? over £1m?(1) below 1:1?1

Omnicom Group No No No

WPP Group No No No

Interpublic Group No No No

Publicis Groupe Yes(2) No No

Havas Group Yes No No

Grey Global Group No No No

Aegis Group No No No

NOTES: (1) After deducting all intangible assets.

(2) Figures calculated before completion of Bcom3 acquisition.

Source: Marketing Services Financial Intelligence.



Zenith Media, Starcom Motive Partnership, MediaVest UK, Optimedia

International, MediaVest (Manchester), Zed Media, Equinox Communications


OMD UK, PHD, Manning Gottlieb OMD, TAP The Allmond Partnership, WWAV

Rapp Collins Media, PHD Compass


MindShare Media UK, Mediaedge:cia, Mediaedge:cia (Manchester), BJK&E

Media, Mediahead, Media Insight


Carat, BBJ Communications, Feather Brooksbank


- Initiative Media, Universal McCann London, Brand Connection, Universal

McCann Manchester, Universal McCann Birmingham


MediaCom, MediaCom North, MediaCom Scotland


Media Planning Group

Source: Marketing Services Financial Intelligence.