513-point drop drags market 19.2% below July high
NEW YORK — A 512.61-point plunge on Wall Street pushed the stock market dangerously close to bear market territory Monday, dragging down showbiz stocks across the board and raising questions about big stock offerings proposed by News Corp. and CBS.
The Dow Jones Industrial Average, which closed at 7,539.07 Monday, is now down 19.2% from its high point of 9,337 in mid-July, and many on Wall Street think the market slump is not yet over.
“There is a flight from equities right now. We are in a bear market,” said Tim Pettee, a managing director and head of equity research at money manager U.S. Trust.
But amid the devastation on Wall Street, Viacom signaled its confidence in the value of its own stock by announcing a $1.75 billion stock buyback.
“I can’t control the international stock markets, but I am telling you that the fundamentals of all of the businesses of Viacom are so strong that I simply concluded that our stock was undervalued. There is an extraordinary buying opportunity that is being presented to us by the market turmoil,” Viacom chairman Sumner Redstone told Daily Variety.
And while news of the buyback, which covers voting and non-voting stock, sent Viacom up for much of the trading day against a generally down market, the slump accelerated sharply in the late afternoon, and Viacom ended down $4.50 to $49.62.
Many other showbiz stocks were hit much harder, however. Walt Disney Co., for instance, dropped $3.12 or 10.2% to $27.50 while CBS fell $3.50 or 12% to $25.75. On Thursday, CBS had risen sharply during that day’s 357 point selloff on the news that it was planning to sell 20% of its radio and outdoor holdings under the resurrected name of Infinity Broadcasting.
But the prospect for such big upcoming IPOs is now in question. News Corp. is also planning an IPO for 20% of its Fox Entertainment group subsidiary, which houses the Fox television and film operations, while Metro-Goldwyn-Mayer wants to raise $500 million.
MGM offering safe
Only MGM’s offering is unlikely to be affected, as it is underwritten by the company’s 90% shareholder Kirk Kerkorian. Both News and CBS will need market conditions to drastically improve if their IPOs, both slated to raise $3 billion-$4 billion, are to have a chance.
“There are no IPOs until this gets straightened out and steady,” said Cowen & Co. analyst Harold Vogel.
Still, neither are planned to go to market until November, which improves their prospects, Wall Streeters said. Neither company would comment.
What may be particularly worrisome for both companies is the prospect that a continuation of the market slump could infect the U.S. economy, slowing the rate of growth in advertising, which would hurt advertising-dependent broadcasting businesses, said Lehman Bros. analyst Larry Petrella.
Disney at risk
Showbiz companies most at risk from a slowdown in the U.S. economy include Walt Disney Co., whose theme parks are extremely exposed to economic conditions, as well as the broadcasters. Disney, not surprisingly, is now down 35% from its year-high, while the broadcasting sector has been weak for several weeks.
Less affected is the cable TV sector, whose business is largely recession-proof. Most cablers have fallen in recent days, but not as much as the overall market: TCI, for example, fell 5.3% Monday to $33.06.
Time Warner is similarly protected. Not only does a big chunk of its earnings come from cable systems, but another chunk comes from cable programming, which has some advertising exposure, but not as much as broadcasters. Time Warner fell $7.18 or 8.3% to $79.31 and is down 20% from its highs for the year.
News Corp. is well diversified across the media sector (unlike its Fox Entertainment Group subsidiary) in newspapers, television and film. News stock, which has plunged 28% from its highs, fell $1.12 or 4.4% to $24.12 Monday.
Viacom is also protected by its big footprint in cable programming. Indeed, Viacom is having a good year, helped by strong results from Paramount Pictures as well as improved performance at Blockbuster.
“I have never seen every one of our divisions operating on eight cylinders as strong as they are,” Redstone said Monday. He declined to comment on whether Viacom was buying in the market already.
Whether the stock market slump worsens now rests on the reaction of small investors, several observers on Wall Street said.
The ‘r’ word
“If you run a mutual fund, then you have to be thinking about the ‘r’ word and that is redemptions,” said U.S. Trust’s Pettee. In market sell-offs in the past couple of years, small investors and money managers have bought actively, often snapping up quality stocks.
“But that is not happening right now,” Pettee said.
“The quality is now being dumped out,” added Cowen’s Harold Vogel.
While the Dow has lost all the ground it gained since Jan. 1, the sell-off is even more acute among smaller companies. The Russell 2000 Index, which represents such stocks, is down 35% from its high of the year.
In the showbiz sector, exhib stocks are typical small-capitalization companies, and the exhib sector has been badly hit in recent months. On Monday, Loews Cineplex fell $1.06 to $7.87, while AMC Entertainment dropped 87¢ to $12.87 and Carmike Cinemas dropped 56¢ to $19.50.