Company Town : Why Time Warner Stock Is Looked at as Often as Its Products Are
After being stuck under $40 a share for most of the last two years, Time Warner Inc.’s stock in 1996 has started doing something unusual: rise in price.
That’s the good news.
The bad news is that skeptics continue to attribute it largely to the soaring overall market, noting that the stock is only now finally bumping up against the high point it reached last August before investors turned sour on the company, as they frequently do.
To be sure, Time Warner’s stock has increased in price by more than $6 a share, or 16%, since the start of the year. That compares with a 7.5% gain for the overall Dow Jones industrial average, one of the few times in recent memory when the company’s stock has climbed more than the Dow. On Friday, after jumping earlier in the week on a favorable plug from an influential analyst, the entertainment and media giant’s stock fell back again when the market dropped, closing down $1.125 at $43.875 on the New York Stock Exchange.
No entertainment stock seems to be watched more closely than Time Warner, and not because it’s any kind of Hollywood bellwether. Rather, it’s because so much is always riding on its trajectory.
Increases in Walt Disney Co.’s stock are usually taken for granted, although that could start to change with its just-completed acquisition of Capital Cities/ABC Inc. There isn’t much drama in watching how much richer Disney Chief Executive Michael D. Eisner will become when he cashes in another round of options, or how much of a genius Michael S. Ovitz will prove to have been in a few years for taking 5 million options to join the company as president.
Likewise, Viacom Inc.’s stock tumbles after Frank J. Biondi Jr. is fired as chief executive, and no one sheds a tear that Chairman Sumner M. Redstone isn’t quite the multibillionaire we thought he was. Seagram Co.’s stock rises and falls. Maybe it’s because of MCA’s movies, or maybe it’s because of Tropicana orange juice.
Time Warner’s stock is like a five-day-a-week referendum. It’s almost as if there was an election when Time Inc. merged with Warner Communications Inc. in 1989, with new results coming in every time the NYSE final bell rings.
Time Warner’s stock price in effect passes judgment daily on any or all of the following issues, and then some: the wisdom of being in entertainment “hardware” versus “software”; whether there is--or ever was--”synergy” in entertainment; the legacy of former Chairman Steven J. Ross; the wisdom of its plan to buy Turner Broadcasting System Inc.; Chief Executive Gerald M. Levin’s competence as a leader; and even the entire Time Warner creation.
Add to that some important practical reasons for the stock to be closely watched. Time Warner has a batch of restless executives lavished with stock options who hope the incentives eventually become worth something before they die.
Still another reason is the implications for Seagram and its chief executive, Edgar Bronfman Jr., who bought nearly 15% of Time Warner’s stock before discovering MCA was available last year. He’d like to sell the stock, but only to a buyer or buyers willing to pay a decent price north of the $38 a share he paid.
Rumors have circulated for months that a single buyer might swoop in to buy Bronfman’s stake, then launch a front-page hostile bid for Time Warner that would set all records for biggest acquisition in history. Don’t bet on it. It would take too much money and lead to too many headaches for any suitor.
Computer software billionaire Paul Allen, who always seems to have a lot more money than he knows what to do with, has expressed interest in adding a Time Warner investment to his already thick stock portfolio. But don’t bet he’ll invest the $2.5 billion that the Seagram stake is currently worth.
A more likely, less sexy, scenario is that if the price gets into the high 40s or breaks $50 a share, Bronfman would call eager Wall Street investment bankers and ask them to start selling it off in chunks. It’s an investment that he wishes he had never made, and so as long as he can squeeze some kind of profit out of it, he won’t be kicking himself as much for not investing the money in something that would have gotten him a much better return.
As for smaller investors, figuring out Time Warner has always been something of a chore. For starters, its organization has long been byzantine, although the company has been trying to make it simpler. Then there’s the fact that the words “net income” no longer seem to mean anything in the entertainment business. Companies, especially Time Warner, steer investors to something called EBITDA, or earnings before interest, taxes, depreciation and amortization. The shorthand phrase is “cash flow.” Stressing that as the gauge, however, seems to suggest that investors should consider as irrelevant all that interest paid out on money borrowed to finance acquisitions.
Last week, Time Warner’s stock got a boost with a favorable plug from Merrill Lynch and its entertainment analyst, Jessica Reif. She and others who are bullish on Time Warner note that the company’s fourth-quarter results were strong, that its results are expected to be better this year and that the company may soon resolve its nasty legal dispute with partner US West. The Denver-based phone company, which owns 25% of a partnership that controls Time Warner’s cable operation, the Warner Bros. studio and Home Box Office, argues that Time Warner’s pending deal to acquire Turner Broadcasting System violated the entertainment company’s agreement with the phone company.
Time Warner executives also have been doing a sales job on Wall Street, arguing that the company will confound skeptics by completing its acquisition of Turner later this year. They add that last year’s management turmoil has eased and that the recent passage of federal telecommunications reform bodes well for the company.
Still, skeptics remain. Cowen & Co. analyst Harold Vogel remains neutral on Time Warner, noting for starters that any settlement with US West is likely to come at a steep price. Furthermore, he isn’t convinced that 1996 will be a good year at the box office for Hollywood, and he gives Time Warner no better than a 50-50 chance of completing the Turner acquisition, citing government scrutiny and the possibility that Turner investor Tele-Communications Inc. may decide to scuttle the deal.
“Admittedly, things are going well right now,” Vogel says. “But I don’t have much of a vision into the second half of the year. I don’t see any reason to rush out and buy the stock.”
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It’s About Time
After being stuck for most of the last two years under $40 a share, Time Warner’s stock finally appears to be moving up. Monthly closes except latest:
Friday: $43.875
Source: Bloomberg Business News
