Water controversy leaves shares in Cadiz out to dry. (Wall Street West).

SHARES in Santa Monica-based Cadiz Inc. barely had a chance to come up for air recently, before heading below sea level again.

The stock received a favorable mention in Fortune magazine back in June, when it was trading for $9 a share, around midway through its recent historical price-range of $8 to $10.

But it plunged to the $4 to $5 range in early July on news that Sen. Dianne Feinstein, D-Calif., added language to a federal appropriations bill that would bar use of federal money for a Mojave Desert aquifer on land owned by Cadiz.

The stock reached $5 in late August, after the project passed its final federal environmental reviews. Under the plan, the Metropolitan Water District would pay Cadiz to store extra water from the Colorado River during rainy periods. In drier times, it would pump out native water from the aquifer.

The dry-season part of the plan has environmentalists and politicians such as Feinstein concerned and threatening to continue fighting the project every step of the way.

Feinstein "continues to have serious concerns about the project," said Howard Gantman, a Feinstein spokesman.

Since the August rally, Cadiz's stock faltered again, to $4 in trading last week. On Sept. 3, the stock fell 17 percent in a single day's trading.

The appeal of Cadiz's stock has always rested on the idea that the agricultural concern would become a large supplier of Southern California's water needs. But investors appear more spooked than ever.

The MWD board will discuss the project at a meeting Sept. 17, said MWD spokeswoman Lynn Lipinski.

All signs point to MWD approval by the end of the year, according to Michael Crawford, an analyst with Westside-based brokerage B. Riley & Co. who owns Cadiz stock. Indeed, the MWD has devoted an entire section of its Web site to publicize the Cadiz aquifer, which it describes as "ideally suited for underground water storage."

And a vote last year indicated two-thirds of the 37-member board are inclined to support a contract between MWD and Cadiz. A simple majority is needed to approve the contract.

Crawford, for his part, believes the aquifer will provide Cadiz with a good source of income for the next 50 years. He said there doesn't seem to be a strong fundamental reason for the recent sell-off.

But the wheels of government grind slowly--the Mojave aquifer story has been around for years, and never seems to bear fruit.

Environmentalists maintain the Cadiz plan will dry out the Mojave too much. With the specter of home-state opposition in the Senate, plus environmentalist lawsuits to boot, the Cadiz project could end up greatly diminished if and when it goes forward.

While it waits, Cadiz can sell off some agricultural subsidiaries to raise cash, and its burn rate is not bad, said Crawford. "I liked this stock at $9, so you know I like it now" he said.

Small Business

It's not widely known, but venture capitalists can become something known as an "SBIC," or small business investment company. The fun in a SBIC is that Uncle Sam will loan the venture capitalist $2 for every $1 the investor puts in, and yet the feds charge only about 8 percent in interest, at current rates, and 9 percent of profit.

Citing those advantages, New York brokerage Gerard Klauer Mattison has helped form a Los Angeles-based $50 million fund (including the federal greenbacks) named GKM Ventures to invest in companies that have sales of between $1 million and $5 million. "We have a three- to five-year time horizon," said Jonathan Bloch, managing partner. "We like companies that have a service or product they have brought to market, but need to accelerate sales." Most investments will probably be made in Southern California, he said.

Quick Takes

When it comes to beating up on entertainment industry stocks, enough is enough, according to a report issued last week by Credit Suisse First Boston. With worries about accounting miscues, bad leadership and advertising doldrums, AOL Time Warner Inc., Fox Entertainment Group Inc. and Walt Disney Co. have been slaughtered in 2002. Credit Suisse analyst William Drewry says the group is oversold, and likes Fox in particular. Drewry also likes Disney at $15.68 a share, with a target sell price at $21. Disney, down about 40 percent on the year, last week traded near Drewry's suggested buy price...

The cover story of the Financial Times on Aug.28 said U.S. housing industry executives are "offloading stock" in anticipation that the best is past. Rates can't go much lower, and the slumping economy has housing executives voting with their wallets to get Out, the paper theorized. The largest 15 homebuilders saw executives sell $258 million net in second quarter, according to Thomson Financial. Curiously, no names were mentioned. So what's up at Los Angeles-based KB Home? The big news is that Chainnan and Chief Executive Bruce Karatz, with 1.66 million shares the largest executive shareholder, has offloaded none, after exercising more than $23 million worth of options in 2001. However, Senior Vice President William Hollinger and Chief Operating Officer Jeffrey Mezger have both been heavy sellers, according to filings with the Securities and Exchange Commission. The stock trades at a modest eight times earnings...

Los Angeles-based investment banker Houlihan Lokey Howard & Zukin recently announced a "Board of Directors Advisory Service," to support outside directors in meeting their fiduciary and corporate governance obligations...

Contrary to conventional wisdom, the deal business has not died. In fact, middle-market mergers are off only one-fifth year to date through August, in terms of number of deals done, according to a recent report issued by Brentwood-based M&A shop Barrington Associates. In dollar terms, volume fell only 12 percent to $72.5 billion from $82.5 billion. Smaller companies are commanding smaller multiples of earnings before interest, taxes, depreciation and amortization, the report said. At less than $25 million in sales, a company typically sells for 4.9 times EBITDA. Once above $250 million, the company sells for an average of 7.7 times EBITDA...

Speaking of corporate governance, hardly a day goes by that Blase Dillingham doesn't get a call from a publicly held client asking for some sort of corporate governance rule clarification. Dillingham, new partner with Manatt, Phelps & Phillips LLP, moved over from Orrick, Herrington & Sutcliffe, where he chaired its corporate and technology group. Dillingham added that most companies are still finding capital hard to come by, but that "PIPEs"--private investment in public equities--still seem to be getting done.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [e-mail].