NEW YORK: AOL Time Warner Inc is expected to make another write-down of several billion dollars – on top of the record US$54bil charge it took last year – increasing the strain on its balance sheet, analysts and investors say.
The world’s largest media company had warned last October of the probability that it would take a “substantial” non-cash goodwill impairment charge in the fourth quarter to reflect the reduced value of its America Online unit since its 2001 merger with Time Warner.
While AOL Time Warner executives have said debt covenants would not be affected by the non-cash charge, accounting experts say such charges could hurt a company’s debt rating as well as its ability to borrow.
Large charges “could very well have material impact on debt covenants because they erode net worth and net worth has some meaning in the world of debt covenants,” said Robert Willens, an accounting specialist at Lehman Bros. “They reduce shareholder equity.”
Media veterans said the looming charge was a reminder that merging America Online and Time Warner was a bad idea. The stock price has fallen some 70% since the deal was completed.
The AOL unit, once viewed as the crown jewel of the combined company, has struggled with a sharp slowdown in advertising spending and subscriber growth. A new management team cut financial targets again last month.
Chief financial officer Wayne Pace told analysts in October that any charges taken in the fourth quarter would not affect compliance with debt covenants or liquidity.
But many investors and analysts said the charge may further constrain AOL Time Warner’s financial flexibility. Chief executive Richard Parsons has said paying off some of the company’s approximate US$26bil debt is a top priority. – Reuters