Beyond Paramount: What Next for Multimedia?

Our long national nightmare--the five-month-old bidding war for Paramount Communications--is almost over.

With its conclusion, Wall Street is hoping for a new beginning of sorts: A revival of investor interest in entertainment, technology, telecommunications and multimedia stocks, many of which have slumped badly since last fall, when the Paramount saga began.

The battle for Paramount, and the mammoth Bell Atlantic/Tele-Communications Inc. merger announced in mid-October, initially spurred wild bidding for almost any company that could boast a tie (real or imagined) to the madly overhyped information highway.

But as the Paramount story has dragged on, it has become a royal bore on Wall Street. Likewise, the wait for a final merger agreement in the Bell Atlantic/TCI deal has caused investors’ eyelids to droop.

The result: Stocks of all the players in these two mega-mergers have probably sunk further than would be dictated solely by a more sober, post-euphoria assessment of their long-term prospects.

“No one has made money in these companies since Oct. 1,” laments Mario Gabelli, a big New York-based media stock investor. “Has that chilled interest (in other multimedia plays)? It’s got to.”

Viacom Inc., the apparent winner in the war for Paramount, has seen its Class B shares plunge from a peak of $61.25 last year to $31.625 now. Rival bidder QVC Network, whose shares hit $73 last year, trades at $46.875 now.

Shares of Bell Atlantic, meanwhile, have fallen 20% from their 1993 peak of $69.125, to $55.50 now.

Still, the profit potential of the developing information highway remains huge. The customers for greatly expanded information and entertainment choices via TV or home computer ultimately number every adult and child in America--and, eventually, the world.

So at some point, investors are sure to take another look at how best to play this revolution. Here, capsule summaries of three key groups in the multimedia industry, and the outlook:

* The telephone stocks. Shares of the seven regional Bell companies are down between 7% and 22% from their 1993 highs. But Wall Street’s concerns seem to be contradictory: Bell Atlantic has been clipped for perhaps paying too much for cable TV king TCI; Nynex, meanwhile, has been dashed for allegedly moving too slowly into cable and other information-delivery systems, despite its planned investment in Viacom.

While the regional phone stocks are unquestionably cheap on a price-to-earnings basis, many analysts see little hope of investor interest heating up soon. Mostly, that’s because Congress may take all year rewriting laws governing what the phone firms--and their competitors--can and can’t do. That will keep uncertainty high.

At issue, for example, is how to open local phone service to greater competition, and whether the regional Bells should be allowed to offer long distance services.

David Shell, senior research analyst at media investor Eagle Asset Management in St. Petersburg, Fla., sees the phone stocks suffering from growing concern about their dividends, and whether those hefty payouts can be maintained as the firms spend on new services.

Still, it’s worth remembering that the Bells have tremendous financial resources to throw at the information highway. For the most progressive of them--Bell Atlantic, US West and Southwestern Bell--investors may be underestimating the long-term payoff.

* The cable TV stocks. Last fall, every cable franchise was viewed as a takeover target for a phone company. Now, Wall Street is much more focused on the looming federal re-regulation of cable rates, which may crimp cash flows.

Thus, shares of Comcast Corp. have dropped from a peak of $28.125 last year to $20.25 now; Cablevision Systems shares have been hurt less, but at $66.25 still are off 8% from their peak. Multimedia Inc. is down 13%, to $34.50.

Yet many analysts continue to believe that the remaining major cable franchises will end up in the hands of phone companies or other larger players. Indeed, new cable takeovers--probably after the rate re-regulation issue is decided in coming months--could be the catalyst for reigniting multimedia fever in general.

Gordon Crawford, media analyst at mutual fund giant Capital Group in Los Angeles, expects Cablevision (2.1 million subscribers) to be “the next transaction.” Time Warner is a possible buyer.

* The software stocks. Some of the savviest observers of the multimedia frenzy last fall argued that, long term, the most money will be made investing not in the information highway itself, but in the programming that runs on it.

That argument still has merit. Note that the stock market value of Walt Disney far exceeds that of most other multimedia players, even though Euro Disney’s troubles have weighed on the stock.

When Paramount shareholders get their money once its takeover is complete, they may begin to focus on other software shares. Time Warner, of course, has already become a target of the Bronfman family, which has accumulated 12% of the stock.

Smaller names could also be up for grabs. TV show syndicator King World Productions (“Oprah,” “American Journal”), for example, “probably is a pretty avid target because they have superior research capabilities that anyone wanting to get into distribution will have to have,” says Jeffrey Logsdon, media analyst at the Seidler Cos. in Los Angeles.

King World stock, at $39 now, is off 11% from its 1993 peak.

Meanwhile, the surprise of the last few months has been Wall Street’s renewed love affair with the networks. Cap Cities/ABC stock recently hit an all-time high; CBS isn’t much below its high.

Jessica Reif, analyst at Oppenheimer & Co. in New York, sees investors continuing to refocus on the networks, based on improving ad growth as the economy expands and on the companies’ takeover values. A CBS-Disney union remains a hot rumor.

Finally, in another software niche, the video games producers and educational software producers are back in the spotlight after last week’s merger announcement between Broderbund Software and Electronic Arts. Many of these stocks, including Atari, Acclaim Entertainment and WMS Industries, are off 20% to 50% from their ’93 highs, though they probably were far overvalued at their peaks.

Entertainment Value on Wall Street

A simple way to measure investors’s attitude toward entertainment, multimedia and telecommunications companies is to look at the companies’ market value--the stock price times the number of shares outstanding. How different companies compare (market value in billions of dollars):

Walt Disney: $24.54

BellAtlantic: 24.13

Southwestern Bell: 22.70

Time Warner: 14.29

Cap Cities / ABC: 11.22

CBS Inc.: 4.85

Apple Computer: 4.30

QVC Network: 1.77

CableVision Systems: 1.51

King World: 1.45

Acclaim Entertainment: 0.81

3DO Co.: 0.48

America Online: 0.41