By Jonathan Weil
CNN anchor Anderson Cooper likes to introduce news segments with the catchphrase "Keeping Them Honest." In that same spirit, it's time again for a reality check on the balance sheet of CNN's owner, Warner Bros. Discovery.
The company that used to broadcast the Goodwill Games has a stock-market value of $25.6 billion, which is 27% less than its book value, or assets minus liabilities. Yet according to its latest balance sheet, just one of its assets, goodwill, by itself was worth $25.9 billion as of Sept. 30. It also showed $33.8 billion of other intangible assets, mostly trademarks and trade names, such as HBO and TNT.
The market is saying those asset values can't be right, even after more than $9 billion of goodwill write-downs last summer. Goodwill isn't a salable asset. It is the ledger entry that one company records when it pays a premium price to buy another. More precisely, it is the difference between the purchase price for an acquisition and the fair value of the acquired company's net assets. In theory, it is supposed to reflect the intangible value of the acquired business beyond its identifiable assets and liabilities.
Whether management slashes the asset values further could be an important credibility test when Warner Bros. reports year-end results in late February. Its stock price is down 57% since Discovery bought AT&T's WarnerMedia business in April 2022. The bulk of its goodwill and other intangibles came from that purchase, which hasn't aged well.
Warner Bros. isn't alone in this regard. Smaller companies with similar predicaments include Sunrun and Topgolf Callaway Brands. CVS Health trades for a 5% discount to book after a 28% drop in its stock price since the end of 2023, and its $91 billion of goodwill exceeds its $71 billion stock-market value.
Kraft Heinz, which has a $36 billion stock-market value, trades for a 25% discount to book value. Its balance sheet still sports about $71 billion of intangibles, including $29 billion of goodwill. The food giant has written down lots of brand names in recent years, including Lunchables. The discount to book tells you the market believes it has a long way to go.
Investors often hear companies and stock analysts assert that large write-downs of intangibles are backward-looking and don't communicate useful information about the future. In fact, they often signal that management has cut its projections for future cash flows, which are used to determine the value of the company's intangibles. That information is forward-looking, even if it is often the case that the market figured out a company's acquisitions were duds long before management acknowledged it.
Sometimes the charges snowball. Xerox, for example, has had large goodwill write-downs in three of its past four fiscal years. They totaled more than $2 billion, including a $1 billion charge last year. Xerox nonetheless excludes goodwill-impairment charges from its so-called adjusted earnings, saying it considers them "discrete, unusual or infrequent items." Perhaps four out of five years would be considered frequent. Its goodwill finished 2024 at almost $2 billion, while its stock-market value is just over $1 billion and recently has been hovering around book value.
For companies with calendar fiscal years, now is the time when many of them are scrutinizing their squishiest asset values most closely, while their outside accounting firms complete their annual audits. As deadlines to file annual reports get closer, some companies likely will post big, headline-grabbing impairment losses over the next month.
These also can mark a moment when a company's management and board are effectively forced by the market to admit publicly that past acquisitions didn't work. Keeping them honest, as CNN's Cooper would say. Be wary when anyone says that write-downs like these don't matter.
Write to Jonathan Weil at jonathan.weil@wsj.com
(END) Dow Jones Newswires
February 03, 2025 05:30 ET (10:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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