Viacom Inc.'s Sumner Redstone, while busy with his takeover bid for Paramount Communications Inc., has continued to be an active buyer of shares in another potential multimedia play: WMS Industries.
Chicago-based WMS is the world's leading maker of pinball machines and is a huge name in the coin-operated video game market. The company also is moving into electronic casino gaming devices, such as video lottery terminals.
Redstone has been an investor in WMS since the mid-1980s, when the company was a mere penny stock. And as is typical when he likes a stock, Redstone has accumulated WMS consistently over the years, regularly buying a few thousand shares here and there on the open market.
In September, however, he picked up the pace: He bought 50,000 WMS shares at $27 each on Sept. 13, then another 37,100 shares in the last two weeks of the month, also around $27. That brought his total stake to about 5.9 million shares, or 25% of WMS' outstanding stock. And in a filing with the Federal Trade Commission, Redstone indicated he intends to continue to raise his holdings.
Excitement over Redstone's latest purchases sent WMS stock up to a new high of $33 on the New York Stock Exchange in October, though it has since slipped back to $30.625 as of Tuesday.
Some investors' interest has worn off because WMS' earnings in its first fiscal quarter, ended Sept. 30, were off sharply from a year ago: 2 cents a share versus 19 cents. WMS blamed the shortfall, in part, on the delayed introduction of Mortal Kombat II, its hotly awaited new arcade video game. Neil Nicastro, WMS' president, says shipments of the new game will begin "shortly."
The few analysts and money managers who follow WMS closely, however, aren't terribly worried about quarter-to-quarter earnings. They're more intrigued with WMS' long-term potential as a software provider to the much-touted information highway--which is, of course, what the proposed Viacom-Paramount marriage is all about.
Indeed, though Redstone simply says he is an investor, some Wall Streeters believe that it is only a matter of time before a takeover offer.
"WMS has a track record for developing great games," says Stuart Linde, analyst at Fahnestock Co. in New York. And to be a player in interactive home video, "You need games," Linde notes.
In the near term, WMS' home video game profit potential is limited by prior agreements with Acclaim Entertainment, which holds the extraordinarily lucrative home-market licenses to the first Mortal Kombat game and to another WMS video smash, NBA Jam. (Never heard of these games? Ask any kid.) When WMS' fortunes began to rise a few years ago, it needed Acclaim's know-how to convert the arcade games into home-market games.
WMS' contract with Acclaim expires in 1995, which essentially means that, until then, Acclaim earns a lot of money that might have flowed right to WMS' bottom line. But nothing is stopping WMS from moving into the home market on its own with games other than Mortal Kombat or NBA Jam. And in fact, says Nicastro, "It shouldn't be a shock to anyone if we get into the home market before 1995." A $125-million cash hoard will help.
Based on WMS' pinball machine revenue (they're selling loads of machines in Eastern Europe and Latin America), arcade video sales from the new Mortal Kombat II, home video game licensing fees and expected orders for casino games, Linde figures the company can earn $1.60 per share in the fiscal year ending next June 30, up 22% from 1993 results.
There are plenty of risks, though. Mortal Kombat II could flop (unlikely), and the move into casino gaming machines may be slow. Also, WMS owns hotel-casino resorts in Puerto Rico that have been a drag on earnings. Wall Street would prefer to see those operations spun off, but that isn't likely for now. WMS wants to leverage its Puerto Rican experience in Chicago, where five riverboat gaming licenses are expected to be awarded next year. "We're going to actively seek one of those slots," Nicastro says.
Back to Redstone: If nothing else, his hunger for WMS shares provides a cushion for the stock if earnings don't match expectations in the short run. As one money manager who sold out of the stock at $26 last summer lamented, "We bailed, and he (Redstone) was standing there with a bucket, saying, 'Thank you, very much.' "
In the long run, Redstone's presence suggests WMS has significant potential as a software generator for the interactive world.
It certainly won't be a cakewalk, given the number of players in the home video game field. And WMS management has stumbled before (in the early '80s). Still, it's worth noting that WMS stock now sells for 20 times expected 1994 earnings per share. In a market where other multimedia plays command price-to-earnings multiples of 30 to 40 or higher, WMS doesn't look terribly expensive for investors willing to be patient.
Future Viacom Division?
Sumner Redstone, whose Viacom Inc. is bidding for Paramount Communications Inc., has also been adding to his stake in another company: pinball and video game maker WMS Industries, whose growth has exploded in recent years. All figures are in millions, except earnings per share.
1991 1992 1993 Revenue $161 $227 $331 Earnings 10.9 25.0 30.7 Earnings per share 0.64 1.21 163.7 Working capital 7.8 75.1 163.7 Shareholder equity 22.5 115.4 152.5
Data for fiscal years ended June 30. Source: WMS Industries