Time's Tumble Leaves Investors Singing Blues

Article excerpt

For one glorious day on June 11, Time Warner hit the lofty figure of $50 a share, roughly the price that Paramount Communications offered for Time Inc. in 1989 when it tried to break up the merger of Time and Warner Communications.

Here today, gone tomorrow.

In the weeks since, the news from Time Warner, the entertainment giant, has hardly been music to investors' ears. According to analysts who have spoken with company executives, Time Warner has indicated that when it reports second quarter results on Wednesday, its music division is likely to post a 25 percent drop to about $120 million in its operating cash flow, or earnings before interest, taxes, depreciation and amortization. Over all, Time Warner may still report a increase in cash flow for the quarter of 13 percent to 15 percent, to about $1.18 billion. But the problems at the Warner Music Group partly explain why the shares dropped back, closing Friday at $46.25. Whether temporary or not, the downturn of recent days ended a solid climb: the stock had made steady progress after dipping to less than $30 just shy of a year ago. While less visible in some ways than Times Warner's movie and cable television divisions, the music group is uniquely valuable in the company's empire. With high profit margins and low capital expenditures, the division last year generated 16.5 percent of the company's $4.5 billion in combined cash flow. The expected downturn in music revenue doesn't change the fact that Warner Music remains the industry gorilla, with a 21 percent share of the market. But these days, just being big no longer generates the cash or cachet it once did. "It has not broken any new groups recently," one rival music industry executive, who spoke on condition of anonymity. "In their heyday they were hitting home runs with major new artists in every field. How are they going to be the cutting-edge ruler they were for so many years?" It is rare, of course, for a label to go a decade or so without a dry spell artistically. But at Time Warner, this particular dusty stretch comes after the division has been roiled by management changes in recent years, including the departures first of Robert Morgado and then Doug Morris as the unit's chief executive. Time Warner's chairman, Gerald Levin, was widely criticized for replacing longtime music executives with Michael Fuchs, the former chairman of Home Box Office. But Fuchs, too, was later ousted and replaced by Robert Daly and Terry Semel, already co-chairmen of the Warner Bros. film division. Changes followed at many of the company's individual music labels, including Atlantic Records. Such turmoil in any entertainment operation often generates deals seemingly aimed at assuring outsiders that a new team is committed to the future and willing to invest heavily. Thus, there was no surprise when the company struck a deal worth a rumored $80 million with the rock group R.E.M., whose first album under it, New Adventures in Hi Fi, was a commercial disappointment; indeed, the deal is now viewed as an impulsive and costly mistake. …