While Wall Street’s honeymoon with Fox Entertainment Group Inc. got off to a rousing start last week, with the third-largest initial public offering on record, some analysts question whether the marriage can last.
“The market is looking at the deal through rose-colored glasses,” said New York-based media analyst Harold Vogel. “The question is, how much should the market pay for earnings that are somewhat inflated by ‘Titanic’ (Hollywood’s most successful film) and ‘There’s Something About Mary,’ as well as their entire cable operations?”
Helping boost sales of the offering last week was Fox’s announcement on the eve of the IPO that the Entertainment Group doubled its net income for its first quarter ended Sept. 30 to $57 million (10 cents a share). The year before, Fox had first-quarter net income of $28 million on revenues of $1.47 billion (5 cents).
The numbers were doubtless attractive to investors, but that kind of success can be fleeting in the entertainment industry. Fox’s first-quarter earnings were inflated by an unusually strong summer at the box office and home-video sales of the smash “Titanic.”
Vogel points out that a hit like “Titanic” comes all too infrequently in Hollywood. He cautions about factoring its success into the future equation. Fox, however, has two upcoming prequels to “Star Wars” that are expected to be major hits.
Even so, some of the revenue projections for the Entertainment Group’s future may be too optimistic. For instance, Fox projects the group will post total revenues of $5 billion in fiscal 1999, about twice the number forecast by many analysts.
Dave Davis, an investment banker specializing in the entertainment industry at Century City-based Houlihan Lokey Howard & Zukin, is wary of Fox’s projections.
“The pluses are that film and related software are sexy investments,” he said, “but they are building growth off the ebbs and flows and are coming off high years, which is hard to sustain over a five-year period.”
Bishop Cheen, an analyst at Charlotte, N.C.-based First Union Capital Markets, said the volatile world economy could also play a major factor in the company’s future.
“You could have an economic recession,” he said. “And (TV and cable) is ad-driven. You could have a bad spate of films and the studio runs cold.”
The successful offering, which raised about $2.8 billion, more than doubles the amount of cash in the vaults of parent News Corp., which retains an 81.3 percent interest in the new company.
The offering includes Twentieth Century Fox Film Corp., the Fox network, Fox-owned TV stations around the country, and Fox’s cable assets such as Fox News and the Fox-Liberty Sports Network. At current prices, the company has a market capitalization of $15.1 billion.
Fox officials have said they plan to use the new infusion to pay down some of News Corp’s $9.3 billion debt.
But a few analysts question whether News Corp. chieftain Rupert Murdoch might start spending again to acquire more pieces for his global media empire. Such moves would increase, not decrease, the debt.
“What does he want to do with the money?” Vogel asked. “He might find some venture to buy and change his mind about paying off the debt.”
Added Cheen: “This is a sexy IPO. You are not buying tuna fish, you are buying show biz, and you can see your investment every night on multiple platforms.”
