MDC Partners Q4: Cliff Freeman Mystery Deepens

(MoneyWatch) 

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MDC Partners' recent conference call only deepened the mystery of what the real condition of Cliff Freeman & Partners is. CEO Miles Nadal told investors:

We divested ourselves of several firms that did not meet our strategic and financial goals ... the Cliff Freeman relationship got far more coverage than it was economically worth talking about. We had about $800,000 invested in the business.

Adweek added:

Asked about MDC's recent parting with its 20 percent stake in New York ad shop Cliff Freeman and Partners, Nadal said the company invested $800,000 at a time when the agency was in a "turnaround phase." He called the buyback a "mutual conclusion," as MDC had no wish to make further investments in he agency.

In a previous post, BNET assumed that when MDC cut its ties with Freeman the parent company gave the agency some cash to unwind the deal. But the notion raised in the call -- that MDC only invested $800,000 in Freeman and the agency had to buy back the MDC stake -- suggests that leaving MDC has cost Freeman money. As BNET readers know, Freeman appears to be on the brink of death. Can it withstand the loss of $800,000 or whatever variable of that stake they agreed to?

Separately, Nadal said MDC expects profits to grow 3-6 percent on a 1-3 percent hike in revenue. He might be right on the profits but I'm betting he's wrong on the revenues. Here's why:

MDC's net income is just $4 million a quarter off revenues of $144 million. MDC earns only $1.01 for every $1 it spends on operating expenses. In other words, this company is barely profitable as it is. It's scraping the bottom. Aside from running at a loss, MDC can only get more profitable.

One interesting problem for MDC is the huge amount of goodwill written onto its balance sheet as an asset -- $238 million. That's roughly half of all MDC's assets. The company has only $41 million in cash.

As everyone has noticed recently, asset prices are falling sharply, and yet MDC's goodwill asset increased this period. Goodwill is generally nontradable, especially in a recession environment, so that asset could be subject to dramatic writedowns and income statement charges, like the $245 million that disappeared at Valassis recently.

Lastly, as page 2 of MDC's own presentation indicates, Nadal's prediction of his own revenues for 2008 was higher than actual revenues.

The coming year will be brutal, as more realistic ad businesses such as Lamar have forecast. If MDC can buck this trend and grow it will be a miracle.

• See BNET's previous coverage of Cliff Freeman and Partners:
• MDC Cuts Cliff Freeman Free; Venerable Agency's Options Get Narrower
• Cliff Freeman Loses Quiznos; Agency Survival in Question
• Cliff Freeman in Freefall? Client Gains Don't Seem Big Enough to Cover Lost Revenue
• Cliff Freeman Names New CEO; Turmoil as Usual