Insider Scandal Jitters May Slow Takeover Mania : Probe of Top ‘Junk’ Bond Dealer Raises Doubts on Financing for Some Deals
Takeovers have been the most awesome money machine on Wall Street. And the investment firm of Drexel Burnham Lambert frequently has been at the controls, revving things up by feeding the financial markets with high-interest bonds that it called “high yield” and others called “junk.”
As the insider trading scandal surrounding professional speculator Ivan F. Boesky widens, an atmosphere of fear and panic among securities professionals has enveloped Drexel. Federal investigators have subpoenaed a number of its officials, and the resulting speculation about who might be involved in the scandal has raised doubts about the ability of Drexel and other investment houses to complete takeovers and corporate restructurings that require junk bonds to be issued.
Troubles for Drexel and junk bonds could have widespread implications for the takeover wave that they have stirred up in so many different industries.
Stocks of real and rumored takeover targets fell sharply last week, although they recovered somewhat toward the end of the week. And Drexel and corporate raiders have felt obliged to assure the rest of Wall Street that their deals won’t fall apart.
While Drexel may lose some business, the firm has completed some hefty financings in the midst of the unfolding scandal. And new takeover assaults emerged last week.
Here is a look at how uncertainty in the takeover and junk bond market could affect various industries:
Entertainment
Entertainment companies have flocked to Drexel in recent years. This year alone, Drexel arranged junk bond financing for Turner Broadcasting System, Cannon Group and Aaron Spelling Productions, and it is currently offering a total of $50 million in bonds for newcomer Carolco Pictures, owner of the “Rambo” film rights.
Entertainment sources questioned whether the Carolco junk bonds might be jeopardized by the Securities and Exchange Commission probe of Drexel, but investment bankers elsewhere predict that the bonds will sell--but at a slightly higher interest rate than initially sought.
Art Bilger, the Drexel executive handling the Carolco bond offering, did not return a reporter’s phone call. But Tim O’Donnell, a banker with Paine Webber, which is managing a simultaneous Carolco stock offering, said he was assured by Bilger earlier in the week that the bond offering appeared to be “in good shape.” Top Carolco officers did not return a reporter’s phone calls.
Drexel early this year raised $1.2 billion in junk bonds for Turner Broadcasting. As of Sept. 30, Turner’s balance sheet reflected $1.7 billion in junk bond issues, accounting for nearly all of the company’s $1.8-billion debt. The company reported a negative net worth of $128 million.
Although Turner recently redeemed $350 million in some notes and said it expects to redeem another $100 million on Dec. 15, a number of industry sources have predicted that Turner might need to refinance its debt.
Paul D. Beckham, Turner’s chief financial officer, did not return a reporter’s phone calls this week. But the company said in its most recent SEC filing that it believes it will have enough cash “to satisfy the company’s operating needs and remaining debt service requirements, including such refinancing as may be required.”
Drexel also helped Fox Television Stations, a company controlled by publisher Rupert Murdoch, raise $1.15 billion in preferred stock to buy six television stations from Metromedia in March. But Fox Television Stations’ debt has already been reduced to 40% of the initial sum, a spokeswoman said, and the company has “no specific plans to refinance. We’re highly motivated to not take (on) any more,” she said.
