Accounting probe stalls rally
NEW YORK — Livent stock remained halted Tuesday, despite efforts by the legit theater concern to answer questions from both the Toronto Stock Exchange and Nasdaq, as Wall Streeters began to assess the fallout from accounting irregularities revealed the day before.
The stock, which closed near its 52-week low at $6.75 Friday, could fall to as low as $3 once it resumes trading, Wall Street traders said, as investors get their first chance to respond to Monday’s revelations by Livent that it had suspended its vice chairman and co-founder, Garth Drabinsky, and his longtime offsider, Myron Gottlieb, after uncovering evidence of the irregularities, which it said inflated the company’s earnings by “millions of dollars” since 1996.
Steve Kee, a spokesman for the Toronto Stock Exchange, said Tuesday the trading halt on Livent stock would continue “until we have more information on the scope of the accounting irregularities.”
“Our market surveillance department has been in contact” with Livent, Kee said. A spokesman for Nasdaq said the same thing.
People familiar with the situation said Livent execs met with TSE officials Tuesday afternoon to answer their queries and sent a written response to Nasdaq on Tuesday.
How low the stock falls when it resumes trading will depend on a range of factors including whether more information is released about the depth of the problems, traders said. Livent has hired KPMG Peat Marwick to investigate the company’s financial records.
Some indication of how investors will respond can be gauged from the debt market, where Livent’s bonds are now trading around 79 cents on the dollar, traders said, down about 21% from where the bonds were trading before the accounting problems were disclosed.
Still, some shareholders in Livent expressed confidence in the company’s long-term future. One holder, who did not want to be identified, said “over time they will turn it around, and they will do just fine.”
The irregularities were uncovered by members of a new management team brought in by former Creative Artists Agency chairman Michael Ovitz, who bought a controlling stake in June. At the time of Ovitz’s investment, Drabinsky and Gottlieb stepped down from senior management positions in favor of Ovitz’s team.
Livent execs are working to contain the damage, insisting that the long-term impact on the company will not be great. While the nature of the problems are serious — accelerating revenue and deferring costs to improve Livent’s reported earnings performance — the amount of money involved is said to be only a few million dollars.
Livent CEO Roy Furman emphasized during an analyst conference call Monday, according to people who were in on the call, that he still believed Livent’s business could be profitable if costs were better controlled. He said Livent’s new management team is putting in place new accounting systems and will be keeping a lid on costs.
Furman also emphasized that the company’s liquidity is fine and a credit line is available to fund future developments into next year.
He said on the call that one of the areas of apparent irregularities related to how Livent had treated licensing deals it had done, ranging from the sale of air rights to licensing the right to produce a show to an overseas production company.
One analyst, who preferred not to be identified, said licensing sales accounted for only about 5% of revenues. But the analyst noted licensing was highly profitable and therefore the licensing deals could have contributed a much greater proportion to earnings.
Livent got support from one analyst Tuesday. PaineWebber’s Chris Dixon, one of the biggest bulls on the stock in recent months, said in a note to clients Tuesday that he was maintaining a “buy” recommendation for speculative investors, “recognizing that the stock can undergo further pressure until management rebuilds credibility.”
Nevertheless, Wall Streeters said some outside investors may be so put off by the episode that they’ll decide to sell at any price once the stock reopens, and the lack of liquidity in the tightly held stock could force the price down sharply.
Most institutional investors have sold the stock over the past year, leaving it concentrated in the hands of Ovitz and his supporters, including Boston investor Thomas Lee. In late June, Canadian newspaper mogul Conrad Black’s Southam Inc. bought 5%, but Black is on the board and voted to suspend Drabinsky.
Other new investors include investment banker Herbert Allen’s firm, which bought a small stake at the same time as Southam, apparently as a vote of confidence in Ovitz. Allen declined comment Tuesday but isn’t likely to be a seller.
The only big institutional holder thought to still own stock is Fidelity Investments, which has about 9.6% (before dilution for the Ovitz-Southam investments). Fidelity declined comment Tuesday.
Livent Inc., producer of theatrical hits “Ragtime” and “Show Boat,” meanwhile, was hit with a U.S. shareholder lawsuit Tuesday in Toronto. The suit, which is seeking class-action status, was filed on behalf of those shareholders who bought Livent’s common shares from May 15, 1996, through Aug. 7, 1998. It alleges the company filed false and misleading financial reports over several years.
(Reuters contributed to this report.)