RADIO DRAMA : Investors Throw Top U. S. Producer Into a Spin With Sudden Stock Selloff

A funny thing happened to Norman Pattiz on his way to be honored June 15 by the California Society of Certified Public Accountants as “entertainment industry executive of the year.” The stock price of his publicly traded Westwood One Inc. fell through the floor.

The drop--26.9% in a single day--was Westwood One’s first belly flop. The cause was a company disclosure that its revenue for the fiscal second quarter would not live up to expectations, the first such disappointment for a star that has constantly ascended in the radio broadcasting firmament.

Since founding the Culver City-based enterprise in 1974, the dapper 45-year-old entrepreneur has built it from a one-horse operation into the largest producer and distributor of nationally sponsored radio programs in the country. Westwood’s on-air talent includes popular talk show hosts Larry King and Casey Kasem, and its stable of personalities also includes such audience grabbers as Dr. Demento and Dr. Toni Grant.

Westwood also has become the nation’s second-largest radio network owner behind ABC since it bought the Mutual System in 1985 and the three NBC radio networks last August. Branching out in a new direction, Westwood recently agreed to buy its first radio station, an FM outlet in New York, and has just announced a deal to buy 50% of an AM station there.

In the midst of its apparent prosperity, the firm met a “Black Tuesday” on May 31 with its very own market crash. Unlike the big Oct. 19 crisis, this one came when the market was rising sharply--the Dow Jones industrial index soared nearly 75 points the same day.

Pattiz has been lionized for years by Wall Street analysts and the media for his success, and he was shocked by what he now can ruefully, half-jokingly refer to as the “instant correction” in Westwood One’s market price after its unexpected news.

45% Loss in Paper Value

The severity of the market reaction also jolted Westwood’s underwriters, Hambrecht & Quist and Merrill Lynch Capital Markets. Last March, they helped the public firm sell another $53 million of its stock at $21.25 a share. Pattiz had the good fortune to unload part of his own shares for $10 million in the March offering. But while he now owns only 6.7% of the common stock, his control of all of the Class B stock still gives him a combined 58% voting power over the company.

It was those individuals and institutions who bought the recent public offering at $21.25 a share who got perhaps the rudest shock of all when the price plunged to $14.25 from the already-depressed level of $19.50 on May 31.

Despite the hurried follow-on announcement of a company plan to buy back “up to” 7% of its 14.2 million shares, the stock price has since skidded further, to below $12. That is a loss of 45% of its paper value since the March offering. (Actually, the company recently had repurchased only 125,000, or less than 1%, of its shares.)

Meanwhile, several small shareholders filed class-action lawsuits in early June against the company, its directors and its underwriters. The company has dismissed as “baseless” the suits’ allegations that it put out misleading financial information beginning last Jan. 12, when it announced its fiscal 1987 earnings of $8.92 million.

A phenomenal 2.9 million shares of Westwood’s stock changed hands the day after the three-day Memorial Day weekend, which was the first trading opportunity following Westwood One’s release of its bad news.

The announcement said that Westwood would not meet analysts’ projections for its revenue and that its profit for its second fiscal quarter ended May 31 would be adversely affected. Analysts quickly chopped their profit projections.

How the company actually did in the quarter, however, will not be reported until about mid-July.

Analysts who track Westwood One widely subscribe to the company’s explanation of its troubles: that the basic cause was a drop in spending by national advertisers on network radio, aggravated by the extended Writers Guild strike, which stalled national firms’ spending plans for television advertising. In turn, this delayed major decisions on spending for radio, the national advertisers’ secondary target.

Analysts consistently say Westwood One is a strong and well-run firm with excellent long-term prospects. However, it is hard to find anyone who will go out on a limb and predict a quick upturn in its fortunes, particularly before the second-quarter results are finally released.

Meanwhile, some disenchanted institutional investors dumped their holdings in Westwood One on May 31, which Pattiz said still pains him.

More than 70% of Westwood One’s stock is thought to remain in the hands of money managers for pension funds, insurance companies and other institutions. Thus, sophisticated investors were the primary traders on both sides of the massive transactions of May 31, much of it obviously at sharply reduced prices.

Stock Unloaded

However, several institutions said they held the stock despite the decline, and at least one bought more for long-run potential. An analyst for an institution that owns a large chunk of Westwood One stock expressed faith in the company’s top management. The analyst, who would not speak for attribution, added that “most of what we learn (about Westwood) is from the company” and that it is “hard to track what’s going on” from outside the company.

Another securities analyst, Jeffrey Logsdon of Crowell, Weedon & Co. in Los Angeles, said portfolio managers for some institutions unloaded their Westwood One holdings rather than have the stock show up on their second-quarter list of investments with a huge percentage decrease in price. “They would rather take a loss than have it on their list,” Logsdon said.

Hambrecht & Quist’s own broadcasting analyst, Earl Hamlin, is one of several who says he thinks the market “overreacted” to Westwood One’s news on May 31.

Pattiz apparently has bounced back from the initial ego blow to show some of his old ebullience and self-confidence.

But there is also evidence of some continuing strain. Pattiz and his right-hand man, company President William Battison, were each accompanied by the firm’s outside securities lawyer, Gerald Boltz, during separate interviews recently. Boltz, a member of the Rogers & Wells office in Los Angeles, formerly was Los Angeles regional commissioner of the Securities and Exchange Commission.

Battison, who also holds the title of chief financial officer, said management met with Boltz after finding “very late in the quarter” that it apparently would not “make the numbers,” the revenue expected by analysts. Then, according to Battison and Boltz, they saw a May 23 trade press article that the parent of the biggest radio network, ABC, was experiencing a drop in advertising. Boltz reasoned that “there must be something going on” and made their bad-news announcement after the market closed Friday, May 27.

As more than one analyst has said since, there is no really good way to report bad news.

Despite the turmoil that followed, Pattiz has not let the embarrassing lapse in his firm’s long-running success story keep him from making several public appearances since then.

For example, he showed up smiling for the June 15 luncheon at the Century Plaza to be honored by the entertainment and sports committee of the CPA society. More than 400 well-wishers attended the $30-a-plate affair. Many of the tables bore markers showing that they were reserved for Westwood One and its affiliates.

Co-chairman Jay Shapiro told the crowd finishing its lunch of boned chicken breast that someone had dubbed Pattiz “the Ted Turner of radio.” Shapiro said Westwood One, founded with a $10,000 investment, had a dramatic rise to a public company that last year had $90 million in revenue and had delivered on its slogan, “The Best of Everything.”

After a video presentation on the company that lasted about 15 minutes, Shapiro introduced Pattiz, who gave a brief, anecdote-punched chat.

‘Victim of Success’

There had been no mention of the firm’s recent troubles, but Pattiz got a knowing laugh when, after telling the audience that he had “never seen so many accountants,” he added that “in the last several weeks, I’ve seen lots of accountants.”

In a recent interview, Pattiz was asked why he sold 500,000 shares of his common stock in March. He replied that he has sold stock in each of several Westwood One public offerings and that he was asked the same question “over and over again on the road show,” a common term for the financial sessions where new stock and bond offerings are promoted. While he intends to keep at least 50% control of his company, he said he doesn’t want to have his entire net worth in one basket.

As for the company’s current problems, Pattiz postulated that the company may be “a victim of our own success.” The firm “had always met or exceeded analysts’ expectations,” he said, and, although national advertising had been in a slump for the last couple of years, Westwood One seemed to be in a “safe niche” of network radio.

Analyst Michael Kupinski of the A. G. Edwards & Sons brokerage in St. Louis points out that Westwood One has become a major force in the radio industry and, as a result, is more closely linked with the industry’s ups and downs.

Pattiz says the same thing himself. And, he says, there are two schools of thought about what is going to happen in the industry. One is that network radio “may no longer be immune to sluggishness of national advertising.” The other is that it is “a temporary glitch, aggravated by the writers strike,” adding that “we won’t really know for some time.”

The lifeblood of Westwood One is advertising. In return for supplying programming to radio stations by tape or satellite transmission, the company keeps 60% of the advertising time on the programs. It then sells the spots to national advertisers that want to reach the specific audience attracted by the individual programs.

Like the television networks, Westwood pays some major stations to carry its programs and spent more than $20 million that way last year. The increased size of radio audiences then can be translated into higher rates that Westwood gets from advertisers.

Pattiz dismisses as “baloney” reports in Inside Radio, an industry newsletter, that part of the proceeds of the March offering was intended to help Westwood One deal with an unexpectedly costly absorption of all three NBC radio networks that it bought last August. He pointed out that virtually all the proceeds of the offering have been earmarked for the announced radio station acquisitions.

While conceding that his firm has had more difficulty turning around NBC than it did with Mutual, Pattiz says his firm has been able to cut the NBC units’ overhead by about $10 million a year, which he said approximates the annual loss that they had been running.

That was not done without the pain of layoffs, and some NBC staffers have complained to the media that its news operations were being “dismantled.” Pattiz responded that the consolidations of Mutual and NBC news operations have reduced duplication.

Ratings Not Yet Out

Logsdon of Crowell Weedon said “certain analysts” had been overly optimistic, thinking NBC could be “turned around on day one.”

Various analysts pointed out that Westwood One still has not been able to cash in on higher advertising rates expected from increased audience share for the NBC networks. That, says Battison, is because the next semiannual revision of industry ratings books is not being put out until September.

Analyst W. Dudley Heer of Duff & Phelps in Chicago voices doubts about Westwood’s venture into radio station ownership. Despite the lure of attractive profit margins, stations can be a more volatile business, he said, adding: “I think they (Westwood One) have increased their risk by doing that.”

Pattiz and Battison, however, spoke forcefully about the benefits. The fact that Westwood One spends a lot of money to get programming on the New York stations, they contended, gives them a leg up on the financing. “If we’re spending this much money renting commercial time,” Pattiz said he figures “we ought to have a piece of the clock.”

Meanwhile, Wall Street has shown no sign of bidding Westwood One’s stock price back up.

“We do not expect the company to regain its credibility until the fourth quarter, with gradual improvement thereafter,” said broadcasting analyst Dennis McAlpine of Oppenheimer & Co., New York, in a June 1 research report. McAlpine predicts a 20% or 25% increase in fiscal 1989 revenue to $150 million or $155 million.

Another New York analyst, Andrew Wallach of Drexel Burnham Lambert, says if the slowdown in network radio growth continues, it will “definitely be a problem for the company.” Pattiz himself says the company could do “a lot of things” that would help near-term earnings, but they would “mortgage 1989” and be “counterproductive” to long-term plans. He added: “We are going to run our business the way we run our business.”

Jerry Del Colliano, editor and publisher of Inside Radio, says he was one who called Westwood One a Cinderella story. The media was so flattering for such a long time, he says, that the company’s management might have begun “believing their own reviews.” What is needed, he opines, is “more owning up and less trying to put a happy face” on its problems.

Pattiz sighs with resignation when asked about the rare barbs that have been written. For instance, an unidentified New York radio executive was quoted as saying he “has all of the irritating habits of the nouveau riche. “ Shrugging, Pattiz says, “I haven’t been rich long enough to become casual about it.”

As for the laudatory stuff, he philosophizes:

“I probably wasn’t as brilliant as people said when the stock was high, and I’m probably not as dumb as people might make me out now.”