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SHOW-BIZ STOCKS: AND THEY SAY AUDIENCES ARE FICKLE

Enterntainment companies keep getting hammered, even on good news

Once upon a time, Wall Street loved the entertainment biz. But these days, anything the media/entertainment companies do--even announcing good news--generally elicits groans.

Take Walt Disney Co. On July 25, Disney said that second-quarter earnings were up 26%, including results from its recently acquired, troubled ABC television network. Its stock fell 3%, to 54 1/8, that week. Shares have since edged up a bit, but they remain near their 52-week low. Then there's Time Warner Inc. On July 16, the Federal Trade Commission finally agreed in principle to its merger with Turner Broadcasting System Inc. Time Warner's stock jumped 12%, to 37 1/8, in the two days following the FTC agreement--then quickly slipped to 33 7/8, near its 52-week low.

All that followed a pattern set by Viacom Inc., which in June announced that the Internal Revenue Service had finally approved the $1.7 billion sale of its cable system. Its stock hiccuped, then headed south. It wasn't helped by Viacom's July 31 announcement that its second-quarter earnings from continuing operations fell 41%, to just $23.3 million on revenues that rose 3.1%, to $2.85 billion. The stock is now trading at 34 7/8, also near recent lows.

Some seasoned media-stock watchers are grumbling that this may be the start of a prolonged downturn. The ``euphoria'' over the high multiples paid for media properties ``is fading,'' says Schroder Wertheim & Co. media analyst David Londoner, though he predicts that ``two years from now, [media stocks] will be darlings again.'' Investor Mario J. Gabelli, whose Gabelli Global Interactive Couch Potato Fund of entertainment stocks is down nearly 10% since early June, says the market has turned so quickly and unpredictably against some entertainment stocks that he has felt at times as if he has been ``shot between the eyes.''

An intractable downturn would be dispiriting indeed. The media megadeals of the past two years were supposed to reenergize the industry. Time Warner offered $7.5 billion for Turner, Disney paid $19 billion for ABC, and Viacom bought Paramount Communications Inc. for $9.9 billion. Last summer, Seagram Co. sold its huge stake in DuPont Co. for $7.7 billion aftertax and bought 80% of MCA Inc. for $5.7 billion. Despite a deal announced on July 30 to sell German rights to MCA's TV shows and movies for $2.5 billion, Seagram's shares are off 10% in the past year. Sighs one senior entertainment executive: ``Investors are questioning the very premise of putting these big assets together.''

The flaw in many bulked-up companies' strategies, says Bankers Trust Securities Corp. analyst Mark McFadden, was a belief that programs and movies would quickly become much more lucrative as distribution channels, such as direct-satellite broadcasting, emerged. ``People thought it was all about producing content. It's not. It's about producing desirable content,'' says McFadden. As entertainment companies race to spend more to improve their offerings, ``people in the delivery business have been able to cherry-pick the best stuff,'' he says.

``FIEFDOMS.'' Big entertainment companies' inabilities to quickly absorb their huge acquisitions and generate fatter margins have left many investors disillusioned. ``Management continues to run these companies as fiefdoms, with little regard to shareholder value,'' says Bessemer Trust Co. executive John Chadwick, who has held sizable stakes in Time Warner and Viacom in the past year.

The big fallout from the stock funk is likely to be a slowdown in media mergers and acquisitions. In the first six months of this year, 366 media deals were announced--10% fewer than in the last half of 1995--according to Securities Data Co. Now, US West Media Group's pending acquisition of Continental Cablevision Inc. for $5.3 billion in stock is under pressure because of the 23% drop-off in the bidder's share price. Even when stocks plunge, says Steven Rattner of investment bankers Lazard Freres & Co., ``sellers generally don't adjust their expectations downward.''

The happiest people in the media business nowadays may be those who are pulling out. On July 17, Ronald O. Perelman sold New World Communications Group Inc., a bush-league TV-show producer and owner of 10 Fox-affiliated TV stations, to Rupert Murdoch's News Corp. for $2.5 billion. New World had been trading at 15 3/16; Murdoch paid $27 a share. Wall Street's reaction? After the deal was announced, News Corp.'s shares fell 7%. Groan.

By Elizabeth Lesly in New York


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Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.
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