* More writedowns expected after European watchdog warning
* Autos, telcos, financials and insurance most at risk
* Spain, Italy amongst weakest countries
By Anjuli Davies and Sophie Sassard and Sinead Cruise
LONDON, Jan 29 European companies are having to
reassess the cost of a rush of takeovers in more buoyant times
as regulators call time on outdated asset values.
Companies are obliged to ensure the goodwill sums in their
accounts accurately reflect the future economic benefits of a
target. As recession bites, some are increasingly reluctant to
trim a figure that reflects the premium they paid.
The European regulator, ESMA, estimated this month that just
5 percent of the goodwill on European companies it sampled had
been written off to reflect current trading conditions, making
it tough to analyse their true worth and management skills.
It highlighted financial services and telecoms but other
research has thrown up the auto sector and metals as well and
highlighted Italy and Spain as areas of particular concern.
The ESMA (European Securities and Markets Authority) says if
goodwill writedowns do not become more accurate this year, it
will start naming and shaming the worst offenders.
Writing off chunks of acquisitions can reflect hasty
dealmaking or merely the economic slowdown, Simon Jones,
director at valuation firm American Appraisal, told Reuters.
"If the market is going in one direction, it's beyond the
control of management," he said.
But if it is not done, or not done enough, investors will
take their own view.
At the end of 2011, almost a quarter of the 600 companies in
the Stoxx Europe index traded well below book value compared to
less than 10 percent four years earlier, a study by investment
bank Houlihan Lokey showed.
Automotives, metals, banks and insurance sectors were
amongst those with the highest share of companies with a market
capitalisation below 90 percent of the book value of equity.
Marc Hayn, Houlihan Lokey's managing director, told Reuters
public relations may be partly to blame.
"Either they overpaid in former times or companies are not
able to communicate to the market the value of their business."
In terms of regions, Italy and Spain showed the worst ratios
of market capitalisation versus book value of equity with just
43 percent and 58 percent respectively.
Italian carmaker Fiat has 10.4 billion euros of
goodwill recorded in its annual report to end-2011, almost
double its 5.7 billion euros market capitalisation.
PSA Peugeot Citroen meanwhile had 1.5 billion
euros of goodwill versus a 2.1 billion euros market cap.
Hedge fund short-sellers have hoovered up nearly all
available shares in Peugeot in their scramble to bet the French
carmaker will be an early victim in an industry struggling to
overcome a collapse in European sales.
Franco-American telecom equipment firm Alcatel-Lucent
is stinging from its $13.4 billion merger in 2006,
which delivered fewer synergies than expected. Its goodwill
stands at 4.3 billion euros for a 3 billion market value.
Many of the worst market cap to book value ratios sit in the
banking sector, with 15 percent for Portugal's Banco Comercial
Portugues, 24 percent for Italy's Banco Popolare
and 29 percent for Unione di Banche Italiane.
Miner Rio Tinto this month sacked chief executive
Tom Albanese and revealed a $14 billion writedown almost
entirely on the value of his two most significant acquisitions,
the Alcan aluminium group and Mozambican coal.
"It is really simple. Big acquisitions, especially big
acquisitions at big premiums, are really dangerous. We've known
it for years," one of Rio's 15 largest investors told Reuters.
Goodwill and asset impairments do not impact cash flow but
can cost top management their jobs, as Rio's Albanese and Anglo
American's outgoing CEO Cynthia Carroll discovered.
Anglo took a $4 billion hit to its Minas Rio project on
Tuesday, slashing the value to $5.6 billion from $9.6 billion
and clearing the decks for new boss Mark Cutifani to push the
delayed Brazilian operation off the ground.
"Companies tend to writedown goodwill late when the market
has already anticipated the risk. But it can be taken positively
because it shows management has a realistic approach and ...
shows they have a strategy going forward," said Hayn.
BHP Billiton is another mining firm likely to write
down assets as low prices and high costs eat into valuations.
Some investors will have already stripped out the goodwill
when evaluating whether to buy or offload stock. But they would
rather companies come clean on goodwill impairments that
continue to catch out less savvy shareholders.
"It is a rallying cry, investors: please read the
evidence...it's up to shareholders to identify ill-discipline
and react to it. This is the accounting recognition of what we