Two major businesses. One folding. The other announcing a financial restructuring this morning.
The common theme: Overwhelming amounts of debt. Toy “R” Us owed $4.9 million in October 2017. It’s total assets, including $2.9 million of merchandise, were $7.3 million. In other words, the toy retailer’s debts were 67% of its assets.
As for iHeartMedia, its assets totaled $12.3 billion, while its debts totaled $23.7 billion as of June 30, 2017. Its financial picture was actually worse than that: Strip out Goodwill, and iHeartMedia had just $8.2 billion of assets supporting $23.7 billion of debt.
For the six months ended June 30, 2017, interest expense totaled $466 million; its operating income was $252.7 million. In other words, earned only 54% of what it needed to simply pay interest on its debt.
This tale of two companies is worth noting for two reasons. First, it illustrates the dangers of debt for a corporation. Second, it’s a graphic reminder of T.Rowe Price’s admonition that “change is an investor’s only certainty.”
Toys “R” Us operated successfully since 1948, but in recent years changes in the retail marketplace turned against it. Its principal failing was not responding effectively to the rise of online shopping.
As for iHeartMedia, the nation’s largest owner of broadcasting stations, it’s problem was that private equity investors led by Bain & Co., Mitt Romney’s old firm, loaded it with debt 10 years ago. The expectation, of course, was that the company would earn enough to pay the debt. But then the Great Recession happened, and internet advertising took off, undermining its business model.
Toys “R” Us has thrown in the towel and will go out of business. iHeartMedia will continue to operate, with its debt largely converted to equity.
And how about major bev/al companies? Anheuser-Busch InBev‘s debt totals $165 billion against assets of $246 billion (67% debt/assets). Molson Coors debt totals $16.8 billion vs. $30.2 billion of assets (55% debt/assets). Constellation Brands has debt of $11.7 billion vs. $18.6 billion of assets (63% debt/assets). Diageo has debt of £18.4 billion vs. £30.1 billion of assets (61% debt/assets). Pernod Ricard has debt of €16 billion vs. assets of €30 billion (53% debt/assets). Brown-Forman has debt of $3.8 billion vs. assets of $5 billion (76% debt/assets).
All the major bev/al companies are reporting strong earnings. Still, what happened to Toys “R” Us – and the years-long continuing slide in beer shipments – should serve as a cautionary tale, even for bev/al executives. The world can turn against you, and heavy debt magnifies the problem.