Gulf & Western Inc., the parent of Paramount Pictures, said Sunday that it plans to sell a finance subsidiary that accounted for 40% of its fiscal 1988 revenue in order to concentrate on its entertainment and publishing businesses.
The plan includes changing the corporate name to Paramount Communications Inc. upon the sale of Associates First Capital Corp., a Dallas-based consumer and commercial finance concern. Proceeds from the sale will be used to expand the company's communications business by new product development as well as acquisitions and investments, Gulf & Western said. The company said it also expects to buy back shares of its stock.
The proposed sale is the latest major component in a process Gulf & Western began six years ago to transform itself from a diversified conglomerate into a tightly focused company. If all goes as planned, it will also be the second time Gulf & Western has sold a substantial part of its business and rebuilt itself. Frustrated at low values placed on its shares by financial markets that seemed to have trouble valuing a company with many disparate parts, Gulf & Western has had considerable success in raising share values with its restructuring.
Still, "I think we're undervalued," Gulf & Western Chairman and Chief Executive Martin S. Davis said in an interview Sunday.
Analyst Jeffrey Logsdon, of Crowell, Weedon & Co. in Los Angeles, agreed. "Publishing and films have obvious synergies. Whereas with the Associates, they really didn't have any," he said. If you look at Paramount Pictures on the basis of the past three to five years, he said, "Paramount is the predominant studio in Hollywood." But, he said, because of the manner in which the company is valued with Associates, "investors haven't reaped all the benefits from the strong results of Paramount," he said.
Paramount's recent motion pictures include the "Indiana Jones" adventures, "Crocodile Dundee" and "Coming to America," the Eddie Murphy vehicle that was a box office blockbuster in 1988.
In moving to raise share values, Logsdon said, Davis, fresh from the experience of the buyout of RJR Nabisco as an outside director, may have also had in mind protecting Gulf & Western from a takeover. The sale of Associates will give the company "a ton of cash" to buy back shares or go shopping for other communications companies, he said.
"The era of the conglomerate is over," Davis said. It has been clear for some time that Gulf & Western would be valued higher without Associates. "But we haven't danced to Wall Street's tune. We were not ready," he said. The divestiture is proceeding now, he said, because Gulf & Western has strengthened Associates, increasing its assets to more than $13 billion. Associates "has consistently outperformed its competition in delivering strong earnings growth and recently reported its 12th consecutive year of record income . . . We believe its potential can be more fully realized by a company with the financial strength at least comparable to ours and with a strategic focus which is more oriented to the financial services business," Davis said.
Gulf & Western, he added, "has two beautiful girls. One fits and the other doesn't. We think that the growth is in entertainment and publishing," he said. The financial and regulatory restraints inherent in the consumer and commercial finance business aren't compatible to those in entertainment and publishing, he said. "To continue in our present configuration would place us at a competitive disadvantage in exploiting fully the global opportunities for expanding our communications operations," he said.
The Associates' U.S. consumer finance network services about 1 million accounts through 520 offices in the United States and Puerto Rico. It offers real estate-secured loans, installment loans and retail installment sales financing. It also has consumer finance offices in Japan and the United Kingdom. In California, the Associates consumer operations include Associates National Bank, which is among the nation's largest issuers of credit cards, and Associates Federal Savings & Loan Assn.
Logsdon estimated a value for the company at $2.5 billion to $3 billion. For the year ended Oct. 31, 1988, Associates had revenue of $2.05 billion, compared to $5.11 billion for Gulf & Western's combined operations. Operating revenue of $372.4 million accounted for about 46% of Paramount's total operating revenue.
Davis said Gulf & Western doesn't have a specific proposal to sell Associates. "We have some ideas in mind," he added.
Company spokesman Jerry Sherman said Gulf & Western isn't prepared to discuss possible acquisitions in communications, but that it's plan is to expand globally.