MEDIA COMPANIES USE ‘OFF BALANCE SHEET’ FINANCING, ANALYST SAYS
In light of Enron scandal, cable analyst Tom Wolzien of Sanford C. Bernstein & Co. took closer look at media companies’ accounting practices and found that some used “off balance sheet” financing, meaning that some liabilities went unreported to Wall St. Report from Wolzien’s team examined AOL Time Warner (AOL TW), Comcast, Cox, Disney, Liberty Media and Viacom, specifically studying health and transparency of their corporate balance sheets. Study was undertaken to reassure investors, but analysts cautioned that they couldn’t be sure companies had disclosed all of their liabilities. Study comes as several media company CEOs have said publicly that for time being they would issue less guidance to analysts. Nevertheless, Wolzien’s team said nothing they learned changed their views about any of 6 companies, and all were rated either “market perform” or “outperform.”
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Analysts asked each company 2 key questions: (1) What is total of all outstanding off-balance sheet liabilities that have recourse to publicly traded parent company. (2) Are there covenants in place within any obligations (including both on and off balance sheet liabilities) that would require them to become due prematurely?
AOL TW CFO Wayne Pace told Wolzien’s team that “anything we do that may be off credit or off balance sheet” is disclosed to primary rating agencies, Standard & Poor’s, Moody’s and Fitch. His comments came after incoming CEO Richard Parsons said in recent conference call that AOL TW would provide less detail about finances of each division. Pace said that New Line Cinema “from time to time” used off balance sheet deals to fund production of movies, borrowing money to make them and repaying debt after production. He also pointed to “synthetic leases” on real estate, saying certain leases were treated as operating leases off books but as owned assets for tax purposes. Practice allows company to benefit in terms of taxes while keeping real estate off balance sheet. AOL Europe has debt of about $750 million, which Pace said would be consolidated and refinanced. Pace also disclosed that, as part of its partnership with AT&T in Texas Cable Partners and Kansas City Partners, company incurred some debt that was not on balance sheet.
Comcast Vp-Finance Bill Dordelman and Dir. of Investor Relations Kelley Claypool disclosed that Comcast had $200 million in performance guarantees with banks, which meant that in connection with license to affiliate, Comcast would have to reimburse bank if affiliate failed to perform. Comcast said it didn’t believe future expenses on that score would be more than $75 million. Only other item mentioned was annual rental costs for office space, equipment and other agreements, estimated at $59.7 million in 2002.
Report said conversations with officials at Cox “revealed no areas of possible exposure to off balance sheet financing” within company. Cox told analysts that as majority family-owned business, it was “not in the business of accepting financial risk.” Cox said it had leases for land, office facilities and equipment in 2000 costing $17.8 million, $20.6 million in 2001, and would have future leases worth $17.6 million in 2002. Company, as of Dec. 31, 2000, had outstanding purchase agreements of $236.4 million for plant and equipment additions and $456.5 million to rebuild some cable systems.
Disney, in e-mail response to analysts, said that, other than operating leases, it was “not aware of any significant off-balance sheet items.” However, company said Euro Disney could “create some liability exposure” and that Hong Kong Disneyland required $300 million as park was being built. Disney’s operating leases for 2002 are estimated at $239 million. Company has invested $344 million in Euro Disney and said if it chose to end its lease in Europe in 2006 it could end up owing as much as $1.1 billion.
Liberty Media’s Vp-Investor Relations Mike Erickson told Wolzien’s group through e-mail that his company had guaranteed portion of obligations of some affiliates and that portion was $1 billion as of Sept. 30, 2001. Liberty’s Starz Encore Group has agreements to show certain films by various producers at cost of about $1.2 billion, study showed.
Viacom Vp-Investor Relations Marty Shea referred to documents filed with SEC that showed Viacom entered into interest rate exchange agreements with off-balance sheet risk, as well as foreign currency exchange contracts. Viacom has provided guarantee on debt and leases to its 50%-owned affiliate UCI totaling $375 million. Company said it didn’t include that in its annual report because it was “immaterial.” Viacom has several long-term leases, franchise payments and other expenses that can’t be cancelled and are worth roughly $552 million through 2006.