In disclosing the potential charge in a regulatory filing last week, Interpublic left open a possibility investors don't want to hear: another financial restatement. The possibilities, seen as a worst-case scenario, came to light in loan agreements in which Interpublic agreed to restrictions on how it uses its money.
Interpublic's stock slumped last week to a 10-year low before recovering some ground to close at $9.47. It's fallen 77% since John J. Dooner Jr. became chairman-CEO in December 2000. The top three institutional investors have been buying up depressed shares in recent months and now collectively own 24% of the company. Interpublic's $6 billion enterprise value-stock value plus debt-is now less than one times revenue, a price that could attract a bidder wanting to buy an ad giant on the cheap, perhaps financing it in part by selling assets. For now, there is no sign of such a bidder emerging.
Loan documents float the possibility Interpublic will take a non-cash charge "not to exceed" $500 million in 2002 or the first quarter of 2003 for impairment of assets at sports marketing company Octagon Worldwide and race tracks owned by its Octagon Motorsports. If taken in 2002, Interpublic said the charge "shall be allocated to each of the fiscal quarters...." That could mean a restatement of early 2002 quarterly financials just months after Interpublic made a series of painful restatements to resolve improper accounting.
Knowledgeable observers believe the most likely outcome will be an Octagon write-off of $100 million to $200 million against earnings either in the fourth quarter or this quarter; that allows Interpublic to avoid restatements related to the write-off since it hasn't reported those quarters yet.
Interpublic already took a $16.2 million second-quarter write-down on Octagon assets.
An Interpublic spokesman declined to comment.
Interpublic in November said it was reviewing "strategic alternatives" for loss-plagued Octagon Motorsports, an operator of U.K. and Hong Kong race tracks. Loan documents filed with the Securities and Exchange Commission leave open the possibility Interpublic will sell all of Octagon Worldwide. Interpublic could offer all of Octagon as a sweetener to unload the tracks.
Interpublic entered sports marketing in the late `90s by buying two firms to form Octagon. Interpublic then paid $240 million in 1999 for Brands Hatch Leisure, a U.K. race-track owner. Interpublic's auditor, PricewaterhouseCoopers, was financial adviser on the race-track deal, done on the watch of retired Chairman-CEO Philip H. Geier Jr.
Octagon Motorsports, built around Brands Hatch, became a financial disaster. In the first nine months of 2002, the unit generated $62.5 million in revenue (less than 2% of Interpublic revenue) but a hefty loss (Interpublic made $180.5 million after accounting for a $39.4 million loss at the tracks).
The disclosures came in filings for what otherwise was generally good news: Interpublic restructured bank debt, giving it breathing room as it works to cut a $2.9 billion debt load. Interpublic agreed to restrictions on capital expenditures, acquisitions and share buybacks, and suspended its dividend (AA, Jan. 27). Restrictions will ease as it sells assets, retires debt and improves earnings.
Meanwhile, top investors are buying more, according to filings last week. Capital Research & Management, the largest holder and an investor since at least 1994, bought 3.7 million shares at last fall's depressed prices to increase its stake to 12.3% in December from 11.4% in September.