The market capitalization of the 200 largest publicly traded companies in the Los Angeles area, as ranked at mid-year each year by the Business Journal, grew by a fairly snappy 11 percent to more than half a trillion dollars for the first time.
But that growth was anything but uniform. The market caps of many local companies surged, thanks to a record year on Wall Street. However, some others such as several in the home mortgage or home building business drooped.
What’s more, there was a change at the top. Walt Disney Co. and its $67.7 billion market cap knocked Amgen Inc. off its perch at the top, where it had sat since 2002. That was the year the Business Journal began ranking companies by market cap, which is the value of a company’s outstanding stock. (The list that ranks 200 L.A. area public companies by market cap as of mid-year begins on Page 28.)
As Disney has ascended under new Chief Executive Robert Iger, Amgen struggled amid scares over the safety of its blockbuster anemia drugs.
Meanwhile lower down the list, a robust economy, high defense spending and skyrocketing energy prices helped boost a variety of companies such as Occidental Petroleum Corp. and Northrop Grumman Corp. But various troubles took the steam out of companies such as KB Home to MannKind Corp.
And that all came as the big private equity players and strategic buyers set their sights on L.A., with Univision Communications Inc. the largest of more than a half dozen public companies acquired over the past year.
“There are large pools of capital out there that can do deals that a few years ago would have been unthinkable,” said Dennis McCarthy, managing director at Los Angeles investment bank B. Riley & Co. “There aren’t as many large public companies here these days as there are in San Francisco or Chicago, and we actually have a couple of transactions pending that would make that list even smaller.”
Some of the biggest news, though, involved two L.A. public companies that for now seem beyond the reach of even the biggest private equity players: ascendant Disney and weakened Amgen.
In the last six months, Wall Street has become wary of safety concerns over the Thousand Oaks drug maker’s flagship anemia product line and uncertain about the strength of its pipeline.
Amgen’s revenues grew 15 percent in fiscal 2006, but appear likely to get hit this year by the scare over anemia drugs Aranesp and Epogen, and the prospect that the government and private insurers may cut reimbursement rates. Those concerns sent Amgen’s market cap falling by 17 percent to $64 billion.
Conversely, Burbank-based Disney was praised for shedding less profitable businesses, and repurposing itself as a content creator with products that can be deployed on a variety of media platforms.
Los Angeles-based equity analyst David Miller gives much of the credit to Iger, who since taking the helm in late 2005 has healed strained relationships with key partners and granted more autonomy to division heads.
“Three of its four core businesses are closely linked to the economy and how people are feeling, and the economy is doing well,” said Miller, who covers the entertainment industry for SMH Capital Inc. “This is a company that has earnings growth, free-cash-flow growth and watches its costs like a hawk. There’s a lot to like about Disney.”
Still, though, its market cap grew by only 3 percent last year.
Middle market dominates
Los Angeles is home to 18 Fortune 500 companies, but the region is better known for a vibrant and diversified middle market of both private and public companies.
While 64 public companies have market caps of more than $1 billion, only 10 are above $10 billion. Toymaker Mattel Inc. (No. 11) came close at $9.9 billion after growing 55 percent over the past year.
Meanwhile, nearly all the other 20 largest companies in the region saw at least double digit growth in market cap. Thanks to rising oil prices, Occidental Petroleum’s (No. 3) market cap grew 10 percent to $48 billion. Energy utility Edison International rose 44 percent to $18 billion, cementing its No. 7 spot on the list.
Satellite TV provider DirecTV Group Inc. (No. 4), which has made headway against cable TV competitors, gained 35 percent to $28 billion. Defense contractor Northrop Grumman maintained its No. 5 spot on the list with a 22 percent gain to nearly $27 billion.
Apparel retailer Guess Inc. saw its second consecutive year of triple-digit growth, jumping to No. 20 from No. 41 on the list as its market cap soared 137 percent to $4.5 billion. After struggling through the 1990s and earlier this decade, Guess regained its reputation as a fashion-forward retailer with profitable standalone stores and one of the highest margins in its industry.
And while Disney showed only modest gains in its market cap, smaller media and entertainment companies that struggled in recent years this year showed significantly stronger growth. Despite setbacks at the box office, DreamWorks Animation SKG Inc. (No. 27) moved up six places as its capitalization rose 28 percent to $3 billion. Gemstar-TV Guide International Inc. (No. 41), which has had more success selling its electronic channel guides than its flagship print magazine, rose 41 percent.
Hallmark Channel operator Crown Media Holdings Inc., which refocused after a management shakeup and brief flirtation with putting itself on the market, shot up the list from No. 92 to No. 76 as its market cap jumped 75 percent to $754 million.
However, the overall growth of the L.A. equities market was clearly stunted by the slowdown in the residential real estate market, given the region’s status as a headquarters for big homebuilders and the subprime lending industry.
Housing slowdown
Fremont General Corp. was forced to stop making subprime loans and later sold off its multibillion loan portfolio. That sent its market cap sliding 25 percent to below the $1 billion mark and plunging the company from No. 48 to No. 71 on the list. IndyMac Bancorp, another big lender to borrowers without strong credit, fell by 29 percent to $2 billion and dropped from No. 27 to No. 40.
Countrywide Financial Corp., a more diversified mortgage lender, dropped only two places on the list to No. 6 as its market cap fell 7 percent to $21.5 billion. Ryland Group Inc., which both builds and lends, dropped 21 percent to $1.5 billion. KB Home (No. 25), facing both a slower new homes market and questions about its handling of executive stock options, fell six places as its market cap dropped 18 percent to $3.5 billion.
Companies targeting the still hot commercial property market performed far better. Commercial real estate services provider CB Richard Ellis Group Inc. rose two spots to No. 12 as its market cap jumped 50 percent to more than $8 billion. Thomas Properties Group Inc. (No. 101), which owns and develops office properties and other real estate, more than doubled its market cap to $379 million.
Meanwhile, Amgen wasn’t the only drug developer with a market cap decline due to concerns about future revenue growth. Abraxis BioScience Inc. (No. 24) whose breast cancer therapy Abraxane has yet to achieve the sales growth Wall Street anticipated, saw its market cap fall 33 percent. MannKind Corp. (No. 70), a sometime Wall Street darling with its first product still a few years from regulatory approval, saw its market cap dip below the billion dollar level.
Hunting grounds
Still some of the biggest news for the year was how L.A.’s reputation for entrepreneurship and innovation continues to make the area a favorite hunting ground for larger competitors seeking strategic acquisitions. Now private equity is staking its claims, which is taking a growing number of companies off the public markets.
The $13 billion purchase by a private equity partnership of Spanish language broadcaster Univision was a significant premium over its $9.8 billion market cap on last year’s list, where it ranked No. 10.
And the list is likely to grow this year. In the past several weeks alone, Hilton Hotels Corp. (No. 8), Gemstar-TV Guide and Guitar Center Inc. (No. 44) have received offers to be taken private.
The Blackstone Group’s $26 billion offer earlier this month to acquire Beverly Hills-based Hilton at a 40 percent premium over Hilton’s share price is indicative of the kind of money ready to find the right asset.
Robert Whyte, managing director at Los Angeles investment bank Mosaic Capital LLC said he’s facilitating more deals with private equity and hedge funds interested in Southern California public and private companies than in any other part of the country.
“They’re seeing tremendous value in California mid-market companies and making offers a board can’t turn down,” he said. “That Hilton deal was insane. I don’t care how many years a company has been in the family, it would have been like looking a gift horse in the mouth to turn that down.”
