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April 6, 2009 6:18 pm
The depth of pension liabilities at some of the UK’s best-known media companies threatens to derail the merger and acquisition activity that many believe is vital to help rebuild a troubled industry.
Falling equity markets and lower government bond yields, leading to lower discount rates, have left the pension funds of many traditional media companies with increased scheme liabilities and lower asset values.
Michael Rudberg, partner at Ernst & Young, says: “Pension plan deficits have ballooned in recent months, particularly for companies with large legacy plans in the media sector.
“Not only does this increase demands on future cash flows, but it is also one of the most critical factors in executing a sale transaction in what is an already challenging deal environment.”
Back in September of last year, the value of DMGT’s pension liabilities stood at £1.6bn. By now they could have risen to £2bn, according to RBS, double its market capitalisation.
This calculation was based on the assumption of a 1.5 percentage point decline in the discount rate for the scheme’s liabilities to 5.5 per cent.
About 63 per cent of the company’s pension scheme assets were held in equities at the end of September last year when its accounting deficit – the gap between what it owes and what it owns – stood at £42m.
Paul Gooden, analyst at RBS, says: “Equities have fallen, bond yields have fallen and this creates problems for all companies but more so for big companies that have big gross assets and big gross liabilities. Small changes can have quite big impacts.”
This month Trinity Mirror revealed the accounting deficit in its pension scheme had risen from £125m to £206m, compared with an £82m market capitalisation, sending its shares down to 28-year lows. About 40 per cent of the pension funds’ assets are invested in equities.
At ITV, pension liabilities have long been seen as a barrier to a takeover. Its pension liabilities were £2.3bn as of December, double the market cap, with the accounting deficit running to £178m.
The pressure on pensions comes as the UK media sector struggles with the collapse in advertising markets and an ongoing shift online by consumers – accelerating the need for regional newspapers, in particular, to combine.
Old media companies tend to be harder hit by pension issues as they are more labour intensive, tend to have quite large pension funds and generally have unionised workforces, which can make it trickier to cut back on staff benefits.
Most industry analysts believe that the “big four” regional newspaper groups – Trinity Mirror, Johnston Press, Newsquest, owned by Gannett of the US, and Northcliffe Media, the regional arm of Daily Mail & General Trust – should become a big two.
Edward Hill-Wood, analyst at Morgan Stanley, says: “Aside from regulation, substantial pension liabilities are the single largest hindrance to full-scale consolidation of newspaper and broadcast markets.”
Although none of the above-mentioned companies has meaningful actuarial valuations this year – hence no looming requirement to top up cash injections – the threat of increases could be enough to scupper any deals.
“Rather than the headline deficit,” says Mr Hill-Wood, the most important issue is how much extra cash will be allocated to the pension fund as it is revalued.”
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