Westwood One given cool reception over offer to swap company's convertible bonds.

Westwood One given cool reception over offer to swap company's convertible bonds

Broadcasting into heavy static on Wall Street is Norman Pattiz, 46, the one-time unemployed television program director who in the 1980s created Culver City-based Westwood One Inc., the nation's second-largest radio network, seemingly out of thin air.

The reason: Investors don't like a current offer by Pattiz, chairman and chief executive, to swap new $400 Westwood One convertible bonds for old $1,000 Westwood One convertible bonds.

Westwood One produces and distributes regularly scheduled and sponsored radio programming for news, sports and entertainment.

If the bond swap is completed, bondholders would own $39.4 million worth of new 9 percent convertible bonds, instead of $98.5 million of existing 6.75 percent bonds, although they also get the right to convert their bonds into a greater number of shares in the radio and programming network.

Despite the equity sweetner, one major bondholder has inked a j'accuse letter to the ailing, $130.6 million-in-revenues Westwood One, which has lost money in its last reported eight quarters.

"As you know, a deal should at least appear to benefit both parties - yours isn't even close," wrote Thomas Revy, managing director of the West Los Angeles-based Froley Revy Investment Co., on Nov. 21. "In my view, you are asking me to reduce my annual interest stream from $67.50 per bond to $36.00."

Revy, who has $9.6 million (face value) of Westwood One bonds in his portfolio, added last week, "This offer is totally unacceptable. I am not going to convert my bonds. I am making my letter available to other bondholders."

Westwood One's exchange offer expires Dec. 17, and is voluntary on the part of bondholders.

In general, investors have been tuning out the debt-laden Westwood One, which lost a reported $22.7 million on revenues of $130.6 million in fiscal 1989 ended Nov. 30, and another $14.6 million on revenues of $107.9 million in the first nine months of fiscal 1990.

While airing red ink, the company has $204.8 million of long-term debt on its books, and interest payments ate up $18.1 million last fiscal year, or nearly 14 cents of every revenue dollar.

The business realities have weakened Westwood one convertible bonds; they traded last week for about $220 for every $1,000 in face value, virtually unchanged from before Westwood One's announcement of the exchange offer. "The fact that the price is largely unchanged means that arbitrageurs are not buying these bonds because they don't perceive the bonds will be worth more after the exchange offer," said Revy.

Westwood One's signal on Wall Street has been growing faint for years. After trading for as high as $32 a share, last week it traded in the $2-a-share range.

Now the bearded Pattiz, the former club bouncer and karate instructor and once hailed for creating a radio and programming network from nothing, is derided as just another leverage-and-buy artist of the 1980s.

The very bonds Pattiz is trying to exchange financed his 1987 acquisition of the money-losing NBC radio network, a $50 million buy that put Westwood One on a red-ink wavelength. Still, in addition to a 1985 buyout of the Mutual Broadcasting System, it vaulted Westwood One into the ranks of major broadcasters.

Westwood One also paid $106 million in 1988 and 1989 for a local radio station, KQLZ-FM, one New York station, WYNY-FM, and half of another New York station, WNEW-AM.

Pattiz was vilified on Wall Street in 1988 for selling over $10 million worth of stock a month before Westwood One stock collapsed on an announcement that company earnings wouldn't be as great as expected.

In all, Pattiz has taken out nearly $45 million from the company, reducing his stake from 54 percent to 7.2 percent of the company's common, although he retains control of the company though "class B" stock, which has super voting rights.

At Westwood One, Pattiz was unavailable for comment last week, but Peter Bardwick, vice president of finance, defended the convertible bond swap offering and said bondholders would benefit in two ways.

"This offer reduces our debt load and makes us more credit-worthy. Anything that is good for this company is good for shareholders and good for bondholders," said Bardwick. "It will help bondholders by decreasing the risk inherent in their security."

Additionally, bondholders get a shot at riding on Westwood One's equity upside, should the company's profit signal strengthen, said Bardwick.

Under the proposed convertible bond terms, bondholders would have the right to convert their $400 bonds into 76.19 shares of Westwood One stock at $5.25 a share.

Thus, if Westwood One stock rose to $10 a share, bondholders would have the right to convert their $400 bonds into 76.19 shares, worth $761.90, although certain restrictions and conditions may apply.

Under the existing convertible bonds, bondholders can convert their $1,000 bonds into 40.68 share of Westwood common, at $24.58 a share - a price far above any reasonable current expectations of Westwood One's stock potential.

"The new bonds clearly give bondholders a change to participate in Westwood One's upside. And that upside possibility will clearly be improved, if the exchange offer is successful."

Despite Bardwick's assurances, Wall Street last week reacted with a yawn to the Westwood One exchange offer, with Westwood One convertible bonds trading in roughly the same range as before the company's announcement of the offer, at about $220 per $1,000 of face value.

Bardwick said last week that the market "needs time to digest" the offer.

Bardwick pointed out that for Pattiz' ailing Westwood One, the swap would be a boon. Assuming 80 percent of the bondholders voluntarily convert, Westwood One's long-term debt load would shrink to $157.6 million from $204.8 million, and annual interest payments to shrink from $18.1 million to $15.6 million, according to a Westwood One offering circular.

The circular also said that the Century City offices of investment banker Donaldson, Lufkin & Jenrette acted as adviser on Westwood One's convertible bond exchange offer, earning $500,000 in fees, and five-year warrants on 100,000 shares exercisable at $2.375 a share, an even lower price than the $5.25-a-share conversion price offered to bondholders in the exchange offer.