Fortune Turns Fickle for Westwood One

Slick promotion was always a hallmark of Norman J. Pattiz’s Westwood One, and it seemed the big radio company had scored another coup last month when it announced plans to air the first American top 40 countdown show to the awakening rock market of the Soviet Union.

But the moment’s glory was slightly dimmed by the announcement, a day later, that the ABC Radio Network had its own deal with the Soviets. Indeed, Westwood’s bigger competitor claimed that it had an agreement to make its No. 1 rated “American top 40” the only countdown show in the Soviet Union.

“We’re the only ones with the right to be there,” said Tom Rounds, president of Radio Express, ABC’s distributor.

The misunderstanding may still be sorted out, but it was one more hint that fortune no longer smiles as it once did on Pattiz, the ebullient entrepreneur who for years seemed the luckiest man in radio.

Fired as KCOP-TV’s sales boss in 1974, Pattiz launched what is now the largest U.S. syndicator of radio programming and owns the NBC and Mutual radio networks, 2 1/2 radio stations and a trade magazine, Radio & Records. Westwood One’s growth made Pattiz the industry’s most celebrated success, a man variously described in news accounts as “Mr. Radio,” “the Emperor of the Airwaves” and “the David who became Goliath.”

But in early 1988, signs of strain dumped the high-flying stock and raised questions about its strategy. Recent events show that nearly two years later, the questions linger:

* The NBC News Radio Network, a problem acquisition that appeared to be on the mend, showed an audience decline of 22% in a semiannual survey released last week.

* Westwood One on Tuesday reported a 1989 loss of $22.7 million on revenue of $130.6 million. While cash flow is strengthening, the company has posted five consecutive quarterly losses; some analysts think at least five more may lie ahead.

* The company is under siege by short sellers--stock speculators hoping to profit by driving Westwood’s stock down further. The “shorts” and other critics are again focusing attention on company accounting practices that have been in dispute for several years.

* Westwood disclosed last month that the Securities and Exchange Commission is investigating the company’s accounting and financial practices; separately, the Federal Elections Commission is looking into a former employee’s accusation that Westwood made illegal campaign contributions.

As the company’s shares have drifted down from a high of nearly $32 in 1987 to Tuesday’s close of $6, most of Westwood’s erstwhile fans on Wall Street have turned neutral or negative on the stock. “I’d never bet against Norm Pattiz, but they’ve got a credibility problem,” says Stephen D. Weinress, partner in the Los Angeles investment firm of L. H. Friend, Weinress.

Company officials maintain that the government investigations will find no wrongdoing and that apparent setbacks disguise the headway being made. When Westwood has absorbed its six acquisitions--worth $215 million--it will be a potent radio conglomerate, they insist.

“We’ve become vulnerable. . . . People are taking shots,” Pattiz acknowledges. “But I’m not worried. I think we’ve turned the corner.”

Pattiz, 46, isn’t known as a worrier. A one-time club bouncer and karate instructor, the executive has a renowned appetite for hard rock, hard work and the good life they have brought him.

Pattiz’s fondness for the trapping of success was memorialized a couple of years ago in a magazine story on a gadget for the executive who has everything: the portable fax machine. A photo with the story showed a beaming Pattiz in the driver’s seat of his Aston-Martin sports car facing a gleaming dash equipped with a top-of-the-line fax and cellular phone.

“It’s become sort of an industry joke,” says Dennis McAlpine, an analyst with Oppenheimer & Co.

Pattiz still spends some time hanging out with the rockers as well as such show-business pals as actors Don Johnson and Melanie Griffith. He can dress the part: Those who know him say he’s a man capable of wearing a $1,000 Armani sport jacket over a $10 rock ‘n’ roll T-shirt.

Pattiz is clearly the dominating personality at the company’s low-slung office complex in Culver City, which is adorned with rock iconography and honeycombed with tiny studios. “Spend any time around there, you’ll hear a high-pitched, cackling laugh floating through the walls,” says a one-time aide. “That’s Norm.”

It was Pattiz’s delight in fast growth that led to the company’s current dilemma, some analysts believe. After building a highly profitable business syndicating radio programming, Westwood One bought the Mutual Broadcasting network in 1985 for $37 million and the three NBC radio networks in 1987 for $50 million.

In 1988 and 1989, Westwood began snapping up stations, paying $39 million for WYNY-FM in New York and $11 million for 50% of WNEW-AM in New York. Last year, Westwood paid $56 million for KIQQ-FM in Los Angeles, which it relaunched last March as KQLZ-FM, known as Pirate Radio.

By all accounts, Westwood has overseen a successful turnaround of Mutual and is turning in creditable performances at WYNY-FM and WNEW-AM. But the problems at NBC, which provide 15% of Westwood’s revenues, are stubborn.

NBC was losing $11 million a year from the networks when Westwood took it over, and the new owner laid off some staff, cut other costs and tried to attract better affiliates by raising the compensation it paid to stations. When the audience rating jumped to 615,000 last summer--up 60% from the depressed level of early 1988--Westwood declared victory.

But now that declaration seems premature, acknowledges Joseph Arsenio, an analyst at Hambrecht & Quist in San Francisco and a die-hard supporter of the company. The new survey results “are a disturbing element,” he says.

Company officials contend that the decline resulted from a statistical blip. They insist that the trend at NBC remains up.

Also in dispute is the extent of KQLZ’s progress. Even competitors have been impressed by the station’s splashy marketing, which has lifted it to No. 7 in ratings in the hotly competitive Los Angeles market. Scott Shannon, a deejay and reputed turnaround whiz, gave the station an anti-Establishment image and won it a following with suburban teen-age boys.

“We got the street vibes--we got the kids,” Pattiz says.

But not all analysts believe KQLZ has yet arrived. The station first drew listeners in part because it carried only one commercial an hour, these analysts say; ratings have since declined as the station has increased advertising to six to eight spots an hour.

KQLZ’s impressive 5.5 ratings in Arbitron’s summer book slid to a 3.6 share for the period from November through January. “I’d say they’re only about a quarter of the way to success,” says Tamara Meldrum, senior buyer with the ICG media buying service in Los Angeles.

While they labor with the firm’s operations, Westwood executives also face the task of trying to improve investors’ image of the company.

Many on Wall Street have been wary since April, 1988, when the company announced that quarterly earnings would be off sharply because of an unexpected downturn in national network advertising. The news dropped Westwood One’s stock 27% in a single day and led to a lawsuit by shareholders claiming that the company hadn’t disclosed pertinent data.

The company, which settled that suit last August by paying $2.5 million and 3 million stock warrants, insists that the SEC’s investigation is only a routine follow-up on the shareholder suit.

The election commission’s investigation grew out of a former employee’s charge that Pattiz concealed donations to the Presidential campaign of Sen. Joseph Biden (D-Del.) by asking employees to make donations to the campaign and then reimbursing them. Company officials play down the charge, pointing out that it involves only $13,000.

Analysts say it’s difficult to judge how much risk the investigations pose to Westwood executives. But inquiries have at least been ammunition for the short sellers, who have accumulated about 1 million of the company’s 14.3 million shares of common stock.

The shorts have also pointed to red flags raised about the company’s accounting practices by Kellogg Associates, a Los Angeles investment-research firm that scours SEC filings to warn its investor clients of developing trouble.

In a report last fall, Kellogg questioned the way Westwood One was capitalizing some radio production costs--treating them as investments that should be amortized over many months rather than as expenses that should be deducted immediately. This treatment enabled the company to show a positive operating cash flow of $5 million for the first nine months of 1989 rather than a cash-flow deficit of about $6 million, Kellogg’s analysis suggests.

Westwood One officials maintain that even if few others in the industry handle their accounting this way, the treatment is justified because rock concerts and interview shows generate additional revenues in reruns.

In any event, the controversial idea came from accountants at Price Waterhouse rather than management, Pattiz says. “They’re not just our auditor,” he says. “They set up financial systems around here.”

Last month, Pattiz came in for a scolding from Forbes magazine for dumping most of his Westwood One common stock, including 2.5 million shares sold in a March, 1988, public offering just before the stock’s big plunge. Three days after the critical story hit newstands, Pattiz announced that he was personally buying back 50,000 shares. The reason isn’t sensitivity to the charge but, rather, because “the stock is so undervalued.”

Some analysts believe that despite its strengthening cash flow, the company will need to sell some assets to service its $185 million in debt, but Pattiz sees no squeeze.

“It’s taken time for our efforts to show up on the bottom line,” he said, “but it’s coming.”