The ink was barely dry on Ted Turner’s agreements to buy New Line Cinema and Castle Rock Entertainment for a combined $ 630 million before the Wall Street investment community weighed in on the purchases and the prices paid.
Castle Rock is a private company, so the more intense scrutiny was directed at terms of the New Line deal. But the consensus was that Turner had done well for himself on both counts.
Smith Barney Shearson analystJohn Reidy said the New Line portion will not dilute TBS earnings. Turner will issue up to 21 million shares of its Class B stock and assume $ 55 million in long-term debt in a tax-free transaction valued at about $ 530 million (based on a price of $ 23.50 per Class B share).
Considering Turner has approximately 300 million shares of Class A and Class B stock outstanding and that New Line posted earnings per share of 45 cents in 1992, Reidy said the impact of an additional 21 million shares would be negligible and could possibly add to earnings.
Concerning Castle Rock, financial types said the $ 100 million of cash Turner spent to acquire the company is less significant than how much he will be willing to contribute in production financing. Castle Rock, which had been actively looking for $ 200 million in production financing before the Turner purchase, will undoubtedly represent a bigger commitment than New Line, since its pictures carry heftier budgets and it doesn’t own a film library to exploit.
Wall Street seemed less concerned with the actual numbers than what the deal might mean for Turner in the long term.
“Clearly a premium is being paid for both New Line and Castle Rock, but there were really no other assets available to Turner once he had decided this was what he really wanted to do,” said analyst Lisbeth Barron of S.G. Warburg.
First Boston analyst Mary Kukowski sounded a similar note. She said investors who focus solely on the price paid — Turner looks like he shelled out a whopping 18 times New Line’s current operating income of $ 30 million — miss the critical longer term strategic benefits these acquisitions bring to Turner.
“Turner wants to be a major provider of general programming to Europe, Asia and Latin America, and plans to launch TNT eventually in all three,” Kukowski noted. “But to be a major player, Turner must freshen up his software, much of which now predates 1950 (largely from his 1986 deal with MGM). New Line and Castle Rock will do just that, positioning to play in these markets, which are potentially many times the size of the U.S. market.
“The long-term potential is enormous,” Kukowski added, “and to maintain that Turner overpaid, relative to the near term cash flows that don’t even begin to reflect this potential, completely misses the point.”
Dissent was not completely absent in the market, however. Arbitragers, playing on concerns that Turner may be overpaying, knocked down the price of Turner’s Class B shares, which had run up about 17% in the last two weeks. The stock closed at $ 23, down $ 1.125. New Line, on the other hand, gained 62.5 cents to close at 19.50.
Perhaps the mostly positive response on the part of Wall Street’s pundits is a signal that the financial community is reluctant to pass judgment on Turner’s moves and is more willing to buy into his entrepreneurial vision than it was in 1986 when he spent $ 1.5 billion for Kirk Kerkorian’s MGM.
At that time, Wall Street crucified Turner for effectively paying $ 1.2 billion for a library of old black-and-white films. (He had to sell the studio’s MGM logo back to Kerkorian to relieve debt).
Financial types said Turner had overpaid by at least $ 300 million. But while the deal forced Turner to parcel out a large chunk of his company to the cable consortium that rescued him, the library effectively ensured the future of TBS — just as Turner said it would.