Entertainment Stocks Are Market’s Latest Blockbusters

Usually it’s box-office numbers that captivate Hollywood.

This time people are obsessed with another set of figures: soaring stock prices.

Since last fall, prices for shares in most major entertainment companies have been rising with the velocity of actor Will Smith’s salary. Entertainment stocks are back in vogue with a vengeance among investors. Not only are investors reaping some good returns, but a lot of really, really rich entertainment executives are getting a lot wealthier.

Monday’s broad stock market surge notwithstanding, the market overall has mostly been treading water lately--with the Dow Jones industrial average gyrating around the 8,000 mark for nearly six months--as investors have worried about Asia’s financial troubles.

Even with Monday’s gain in the blue-chip Standard & Poor’s 500 index to a record high of 1,001.27, the S&P; is up just 4.8% since Oct. 1.

By contrast, Bloomberg’s index of 25 Hollywood-related stocks has surged 18% since Oct. 1.

Likewise, Salomon Smith Barney’s entertainment/leisure index, which includes the major entertainment firms, has jumped sharply since the beginning of December.

Shares of long-suffering Viacom Inc., although still down in price from three years ago, have recovered from about $25 in April to a close of $41.25 on Monday, just below their 52-week high.

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Viacom is putting a big piece of its Simon & Schuster book unit on the block, paying down its debt and reaping benefits from the hit film “Titanic,” which its Paramount Pictures unit helped finance.

In addition, Viacom is revamping its ailing Blockbuster Video unit in anticipation of one day spinning off part or all of the video chain to the public.

Time Warner Inc., which spent most of the early 1990s unable to break the $40-a-share barrier, closed at a 52-week high of $65. Despite problems in Time Warner’s film and music units, investors are bullish on the company’s cable TV operations, once considered an albatross and now increasingly viewed as a jewel.

Rupert Murdoch’s News Corp. has shrugged off concerns about its potential exposure to Asia’s economic problems as well as concerns over “Titanic,” which its 20th Century Fox unit mostly financed. Seagram Co., owner of Universal Studios, has the most sluggish performance, but analysts believe that’s the fault of the company’s liquor operations in Asia rather than its entertainment operations.

Recovering CBS Inc. is up by more than 60% from a year ago. New issue Metro-Goldwyn-Mayer Inc., still climbing back after suffering substantial neglect in the late 1980s and early 1990s, is down a shade from its initial public offering price of $20 a share in October, albeit only by $1.

But the star performer by far has been Walt Disney Co. Trading at a little more than $70 a share a year ago, it closed at $108.81 on Monday, reaping the benefits of better-than-expected earnings posted last week, due in part to its strong theme park business and lucrative franchises such as ESPN. A lot of Disney executives, past and present, are enjoying the ride.

ABC President Robert Iger received options for 700,000 Disney shares in early 1997 when Disney completed its acquisition of Capital Cities/ABC. Those options are now worth about $36 million.

Michael Ovitz deserves to be enshrined in the record books for cutting the best severance deal in history for his 14-month stint as Disney’s president. When he left the company in December 1996, Ovitz’s platinum parachute was worth an eye-popping $78 million.

Now the package is worth more than twice that. Ovitz’s 3 million options, exercisable at $57 a share, are worth more than $155 million now. Add to that the $39 million in cash he got, and his package is worth nearly $195 million as of Monday.

Then there’s Michael Eisner.

Last year, the Disney chief executive reaped an estimated $565 million in a single day when he exercised options he had from his old contract.

But his current contract could make that number look like a pittance. To entice Eisner to stay another decade as chief executive, Disney’s directors in September 1996 gave him 8 million new options.

Eisner can’t even start exercising the first batch of the new options until 2003. But after only 16 months, he is already up nearly $270 million on paper thanks to Disney’s soaring stock price. At that rate, his new options could easily be worth more than $1 billion--maybe even as much as $2 billion or more if Disney’s stock continues to rise as it has--before they expire 10 years from now.

The reason entertainment stocks have been attractive to investors goes beyond the individual stories of each company.

Investors avoided entertainment companies following the glut of mergers and byzantine financial deals that were hatched from 1994 to 1996. Companies have since trimmed their debt, restructured and worked past some of the acquisition indigestion.

“People said: ‘Hey wait a minute. The fundaments here are pretty strong, and these stocks [are] underperforming,’ ” said PaineWebber analyst Christopher P. Dixon.

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Then there’s the perception among investors lately that companies such as Disney are a relatively safe haven for their money amid the turmoil in Asia and uncertainty in the technology sector.

As important as the foreign box office is to entertainment companies, analysts believe the firms’ exposure to Asian economic problems remains relatively small. That goes even for News Corp., which analysts believe is sufficiently spread out to avoid a big financial hit.

Because the companies are so large, the instability in Asia affects a relatively small part of their business. And Hollywood doesn’t do all that much business in the countries with the most instability, such as Indonesia.

Also helping to boost earnings, and therefore stock prices, is the surging advertising climate caused by the strong U.S. economy. That’s helped such TV channels as Time Warner’s Cable News Network, Disney’s ESPN and Viacom’s Nickelodeon.

Still, there are some caveats. Analyst Jill S. Krutick of Salomon Smith Barney notes that a slowdown in the economy later this year--as some economists are predicting--could hurt entertainment companies.

And analyst Harold Vogel of Cowen & Co. says he isn’t so sure the economic problems in Asia won’t hit entertainment companies harder than some analysts are predicting, as currencies soften and some foreign companies suffer cash crunches.

He predicts, for example, that some U.S. entertainment giants may encounter foreign TV groups that are unable to fulfill contracts, resulting in a restructuring of those deals.

“The safe haven may be a leaky haven,” he says.

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Taking Stock

One entertainment executive who’s benefited from the rise in entertainment stocks is former Disney President Michael Ovitz, whose platinum parachute today is worth $194.4 million--more than twice its original value of $78 million. The severence package, based on Disney stock prices, in millions:

Monday: $194.4

Source: Bloomberg News

The Market’s ‘E’ Ticket

Most entertainment stock prices have been surging, but Seagram is an exception. A sampling:

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Stock 52-week high/low Oct. 1 close Monday’s close Viacom Inc. $43.44/$25.25 $31.34 $41.25 Walt Disney Co. 108.81/71.13 82.00 108.81 News Corp. 25.63/17.25 20.56 24.56 Time Warner Inc. 65.00/38.25 54.75 65.00 Seagram Co. 41.75/30.25 35.25 34.88

Stock % change from Oct. 1 Viacom Inc. +31.6% Walt Disney Co. +32.7 News Corp. +19.5 Time Warner Inc. +18.7 Seagram Co. --1.05

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Source: Bloomberg News