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— Backstory —
Beasley Broadcast Group Inc., Belo Corp. and Blockbuster Inc. -- they're penny stocks now. Same with Cenveo Inc., Charter Communications Inc. and Citadel Broadcasting Corp. Even the stock of CBS Corp., a chip once so blue as to be named the Tiffany Network, recently dipped below the penny-qualifying threshold of $5 per share. Pick a letter, almost any letter, and there's a group of previously proud media companies slumming as penny stocks to list under it. Sinclair Broadcast Group Inc., Source Interlink Cos. and Sun-Times Media Group Inc.
Most literally trade below a buck a share. Check Emmis Communications Corp. and Westwood One Inc. in radio. Acme Communications Inc. and Nexstar Broadcasting Group Inc. in television stations. Idearc Inc. and R.H. Donnelley Corp. in the previously inviolate Yellow Pages. Media and entertainment isn't the only industry sector devolving into a slew of penny stocks. Last month, on announcing the temporary suspension of its own suspension rules, Nasdaq noted that 344 securities listed on the exchange were trading below $1 per share on Oct. 9, a 438% increase over the year-earlier number. It also reported a further 300 were trading between $1 and $2. In normal times, with at least modest amounts of credit available, such low stock prices would inspire management buyouts and other take-private activity. But these aren't normal times, so the companies stuck with penny stocks pile up, waiting for liquidity events that either put them away or see them to a sunnier day. Media and entertainment companies, however, confront an advertising downturn as well as a credit crunch. And it's not just political advertising that has ceased; much of automotive advertising -- which is the leading category, historically -- is also going away. For some hit by this double whammy, the writing's on the wall. What is the market telling you, asks a distressed-debt expert, when the bonds of TV station group Young Broadcasting Inc. trade at 2 cents on the dollar, secured bank debt is discounted to 60% of par value and the stock's stalled at 3 cents a share? Companies saddled with penny stocks invariably generate talk of reverse stock splits. Such talk is most rampant right now at Sirius XM Radio Inc., which in February has $300 million in convertible notes due. To help meet this maturity, possibly through an equity offering of a stock currently trading under 20 cents a share, Sirius has obtained board approval for a reverse split somewhere between 1-for-10 and 1-for-50. It also awaits shareholder approval, or not, at an annual meeting on Dec. 18. Many criticize reverse splits as cosmetic exercises that leave the financial health of those employing them unchanged. What's more, a recently released study of more than 1,600 reverse stock splits correlates them with "significant negative abnormal returns" for the next three years. Yet they can offer advantages in addition to preventing a delisting of the sort Nasdaq historically demanded after a company's shares trade below $1 for 30 consecutive days. Some mutual funds limit their purchases to stocks trading above $10 per share, for instance, while some money managers routinely sell stocks that fall below $5. In addition, analysts tend to stop covering a company once its stock is delisted, leaving investors clueless as they suffer the reverse of sticker shock. "After a price retreats below a nebulous inflection point," an expert on such matters explains, "a self-fulfilling prophecy kicks in that keeps it from ever coming back." It's the psychology of believing LIN TV Corp. was a steal a year ago at $10 per share but is suspect, if not worthless, when its price slips to under $1. Such indiscriminate reasoning will correct itself once penny-stock companies find their place in this new era -- an era where liquidity concerns not only supersede equity concerns but, for now, rank as the only concern. As the distressed-debt expert says of the difference between this era's survivors and failures, "If they don't have a good liquidity story to tell, they no longer have anything to say." Richard Morgan covers media for The Deal. |
It has been a year of trading indiscriminately, a year in which media and entertainment companies of all stripes and sizes saw their markets caps decimated. Corporate specifics like credit availability or advertising vulnerability seemed to matter not at all.
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