This Feature |
|
Related Items |
|
Friday, July 24, 1998
Golden Books Family Entertainment
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBFE)") else Response.Write("(Nasdaq: GBFE)") end if %>
Phone: 212-547-6798
Website: http://www.goldenbooks.com
Price (7/23/98): $4 11/16
HOW DID IT FIND TROUBLE?
What do Frosty the Snowman, Rudolph the Red-Nosed Reindeer, and the Lone Ranger have in common? They're all well-known properties owned or licensed by Golden Books, a top name in family entertainment that's repeatedly threatened to make a splash but has ended up with a red nose after getting tanked. Where's Tonto when you need him?
Golden Books, The Turnaround Story, began back in May 1996 when Richard Snyder, former Chair/CEO at Simon & Schuster, teamed up with Warburg Pincus Ventures and media mogul Barry Diller to buy a controlling interest in what was then known as Western Publishing. Snyder has restructured the money-losing operations and added some new properties such as Broadway Video Entertainment.
Unfortunately, the turnaround has yet to turn. After $132.3 million in charges in 1996, Golden Books took charges of $11.5 million last year and $6.1 million in the first quarter. Asset sales have injected cash but reduced overall revenues. And across-the-board weakness in the first quarter sent revenues from continuing operations down 17% to $46.5 million. The company blamed lower sales to major customers, a tough comparison due to last year's successful Star Wars tie-ins, and a transition to a new production facility.
The negative operating cash flow is taking the gold away from Golden Books in a hurry. Cash plunged from $57 million at the end of December to $30 million by the end of March, prompting S&P to downgrade the company's debt to junk status with a negative outlook. The stock sank as low as $3 5/8.
The only good news of late is that after Snyder arranged a $30 million revolving credit facility, his backers decided on July 8 to make another $25 million available to the company. Funds drawn down will be exchanged for convertible preferred stock with a coupon of 5% and a conversion price of $4.87, or 20% above the ultra-depressed price at that time.
BUSINESS DESCRIPTION
Golden Books publishes a wide range of children's and family-related entertainment products, including storybooks, coloring/activity books, electronic storybooks, puzzles, and educational workbooks. Its flagship "Little Golden Books" product is over 50 years old and helps the company lead the way among children's publishers in the retail market.
The company has a five-year licensing deal with Disney that expires in December of 2002 and allows it to use all of Disney's animated characters, including Mulan. Other licensing pacts have been struck for Sesame Street characters and Barbie. In turn, Golden Books has licensed characters from its library, including Pat the Bunny and The Poky Little Puppy, to toy and clothing manufacturers.
Major customers include mass market retailers Wal-Mart, Toys "R" Us, Kmart, and Target. Competitors include Random House, Scholastic, Simon & Schuster, Landoll, Publications International, and School Zone Publishing.
The Golden Press Holding investment group that includes Warburg Pincus controls 41% of the stock, including 6.5 million shares from preferred that converts into common at $10 per share, 3.25 million warrants exercisable at $10 per share, and 3.9 million shares owned by former CEO Richard Bernstein. Other insiders own 5.4% of the stock. Investor Mario Gabelli holds 8.9% and Hallmark Cards controls 8.7%.
FINANCIAL FACTS
Income Statement*
12-month sales: $224.3 million
12-month income: ($61.7 million)
12-month EPS: ($2.62)
Profit Margin: N/A
Marker Cap: $127 million
(*Unadjusted for one-time expenses or dispositions. Assumes full dilution from the preferred and warrants, but doesn't include the latest preferred deal.)
Balance Sheet
Cash: $30.1 million
Current Assets: $134.5 million
Current Liabilities: $64.3 million
Long-Term Debt: $149.9 million
Ratios
Price-to-earnings: N/A
Enterprise value-to-sales: 1.1
HOW COULD YOU HAVE SEEN IT COMING?
The essence of a turnaround is a return to profitability. That hasn't happened. The 10-K indicated the company needed more money, and the ugly first quarter numbers made that need even more urgent. With such uncertainty hanging over a basic item like working capital, anybody holding the stock on hopes of a return to those golden years should have been scared by first quarter results.
Moreover, there have been reports that Mario Gabelli began cutting his stake last year, and former CEO Bernstein and current president Eric Ellenbogen were large sellers earlier this year at around $11. Not a good sign.
WHERE TO FROM HERE?
Golden Books has some strong evergreen brands, and it has licensed even stronger brands. In theory, this could be a profitable business.
The Disney deal could pay off nicely this year given that Mulan is a bigger hit than was the disappointing Hercules. Unfortunately, the Disney deal also requires that Golden Books make substantial minimum payments regardless of sales. And with over a third of revenues tied to just this one pact, Golden Books is heavily dependent on licensing deals.
Other positives are the March launch of R.L. Stine's Fear Street books and the entertainment unit's move into children's audio and video (two Madeline videos are on the way). Also, a new manufacturing facility in Wisconsin went online in February and is now fully operational. It should save money going forward.
Still, Snyder has said there will be another $6.9 million in charges this year. The company doesn't expect to be profitable until 1999 at the earliest. If that ever happens, the $208 million in net operating loss carryforwards will come in handy, but the two analysts covering the stock don't appear sanguine
Indeed, children's publishing is extremely competitive, particularly in the mass market where the superstores demand low prices. Also, while the new investment is a shot in the arm, it will dilute future earnings by adding up to 5.1 million shares (19%) to the total potential shares outstanding. Moreover, a company with a negative book value of $82 million has to have an awfully compelling story to seem like a bargain at any price.
Can that lone ranger Snyder somehow lead Golden Books to a happy ending, or is this sunset a prelude to oblivion? Snyder does have experience as well as supporters with deep pockets. Yet until Tonto arrives in the form of meaningful financial improvements, I wouldn't count on this one.
-- Louis Corrigan
([email protected])
Check out the Daily Trouble Message Board!
|
|||||||||
<% if request.querystring("source") = "yhoolnk" then referer = Request.ServerVariables("HTTP_REFERER") if referer = "" then referer = "http://finance.yahoo.com/" response.write " " end if %> <% function YahooWelcome if gsCookieUsername = "" and request.querystring("source") = "yhoolnk" then %> |
Welcome, Fool! |
|
Be a Fool and get free, unlimited access to our site.
What we offer: |
© Copyright 1995-2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. The Motley Fool is a registered trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us |