The bill for the boom years is becoming evident just as the Chancellor of the Exchequer spies light at the end of the tunnel. ‘Twas ever the way.
Johnston Press paid for these deals with bank debt. The value of the newspapers in question has been written down drastically on its balance sheet. But in the liabilities column, that debt still exists, emitting death rays that destroy jobs in the real world.
Or take Incisive Media, burdened with so much debt relative to plummeting profits that it resembles an upside-down ziggurat.
Incisive Media will this year attempt to service net debts of around £400m off the back of EBITDA of £45m. No doubt the pressure to cut jobs in order to support profits and thus pay the company’s interest bill has been immense. Quite how fast such a company will grow in the future remains to be seen.
At the meeting, Leslie Hill, the retired chairman of the pre-merger ITV network, asked what benefits had been accrued by the company’s expansion of net debt from £800m to £1.25bn during the past five years.
Back came the answer: the money was spent on sports rights (fail); online businesses (fail); production (hardly a roaring success).
And yes, there was the small matter of a £250m share buyback in 2006.
So ITV borrowed £250m from its banks in order to give the cash to its shareholders?
Buying back your company’s shares from shareholders is an established ruse to support the share price. But doing this with borrowed cash smells very wrong.
In this respect, ITV resembles an athlete who couldn’t keep up with the high-octane pace of casino capitalism. The answer, of course, was the financial equivalent of performance-enhancing drugs. After injecting hot money from loose bankers into the system, ITV was ready to compete.
Companies exist to allocate capital to productive use. The greater their ingenuity in doing so, the greater the return that shareholders will receive.
Doing this is hard. Withdrawing borrowed money from a cash machine and handing it to investors is a lot easier.
I suppose that the relative cheapness of debt relative to equity during the noughties provides a technical explanation of sorts.
Even so: buying back your own shares is an admission that you can’t find anything particularly exciting in which to invest. And yet look at ITV in 2006: this was a company yearning so desperately for creative investment that it enticed Michael Grade, the master impresio, to join it as executive chairman.
Mortgaging the future to invest in the present is one thing. Mortgaging the future to fend off awkward questions about your business model is something else.
ITV’s debt-fuelled share buyback doesn’t quite qualify as a Bernie Madoff-style Ponzi scheme. But it wasn’t that far off, either.