Print Published 12th Jun 2016, 14:39

Shareholders bear more risk as UK listed marketing groups pursue acquisitions

Publicly listed marketing companies have been increasing their borrowings and increasing the risk to be borne by their shareholders as they pursued more acquisitions, according to the latest annual review of their balance sheet vulnerability prepared by Marketing Services Financial Intelligence.

And the review also warned that those balance sheets may be weakened further if the UK decides to leave the European Union:

“There must be a probability that sterling will lose value in world currency markets, in the short term at least, if the UK decides to leave”, the report said. “That would make overseas acquisitions more expensive even if it boosted the value of revenues earned overseas and, with it, the size of net receivables from abroad. Both consequences would increase publicly listed marketing companies’ capital requirements, whether obtained from shareholders or in bank borrowings.”

The MSFI Vulnerability Ratio is designed to highlight those UK publicly listed marketing companies whose borrowings are providing a worryingly big proportion of their capital resources and where capital provided by shareholders is susceptible to erosion by heavy write-downs in the value of past acquisitions.

To this end the vulnerability ratio calculated for each company comprises two components: the  level of borrowings relative to shareholders’ funds and the level of intangible assets (like goodwill) derived from acquisitions.

According to the latest study, the overall balance sheet vulnerability of publicly listed marketing companies – taken together – increased by over 10% last year as borrowings made up a bigger proportion of capital employed and the book value of intangible assets showed a big rise after a spate of acquisitions.  Five companies edged into the “vulnerability zone “ with ratios in excess of 2:1 (see the note on methodology in the report itself).

The aggregate net borrowings of companies covered in the report totalled £3.4 billion at their latest year ends compared with £2.4 billion a year earlier – an increase of 38.5% – while funds provided by shareholders remained virtually unchanged.  “Thus the long-term capital foundations on which those businesses depend have been weakened by an increasing reliance on debt”, the report says.

As the report acknowledges, the MSFI Vulnerability Ratio adopts a broad brush approach, but quite an instructive one.  Indeed the report notes that, over the 12 years during which the annual survey has been conducted, nine companies that had drifted into the “vulnerability zone” with a ratio of 2:1 or more had subsequently had to undergo a capital reorganisation and/or to raise more capital from shareholders, or have reduced debt by disposing of major subsidiaries, or have been sold or rescued by other companies.  A few had endured the ultimate humiliation of administration.

The latest report is published by Marketing Services Financial Intelligence today and is available only to subscribers.  To become a subscriber follow the instructions provided.