Metromedia Companies

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Metromedia Companies

1 Meadowlands Plaza
East Rutherford, New Jersey 07073
(201) 804-6400
Fax: (201) 804-6540

Private Company Incorporated: 1955, as Metropolitan Broadcasting Corp.
Employees: 20,000
Sales: $2 billion (est.)
SICs: 5812 Eating Places; 4813 Telephone Communications
Services; 7812 Motion Picture Producers and Studios

Metromedia Companies evolved over the course of its relatively brief history from a small, publicly held television and radio company into one of Americas largest private partnerships. In 1995, the restaurant and communications conglomerate was controlled by John Kluge, an octogenarian multibillionaire. At that time, over half of Metromedias holdings were concentrated in several budget steakhouse chains, including Ponderosa, Bonanza, Steak and Ale, and Bennigans. Metromedia also has a significant stake in WorldCom Inc., a publicly held longdistance telephone service. The company owned a controlling stake in struggling Orion Pictures Corp. after rescuing it from bankruptcy in the late 1980s. In 1995, Metromedia returned to its roots with the acquisition of two Eastern European radio stations.

Chairman John Warner Kluge was the driving force behind Metromedias formation and growth. Kluge (which means smart in German) earned a reputation for identifying promising businesses in their infancya knack he has modestly attributed to luck. The independent television stations he accumulated in the 1960s and 1970s formed the nucleus of Americas fourth major broadcasting network, Rupert Murdochs Fox group. His investments in the fledgling cellular telephone and paging industry in the early 1980s quickly grew into a multibillion-dollar stake. But in the early 1990s, media attention focused on his apparent loss of the Midas touch, as his investments in budget steakhouses and film wallowed.

Kluge (pronounced Kloo-gy) was born in Germany in 1914 and immigrated to the United States with his family in 1922. He fostered his money-making skills while on scholarship at Columbia University, both in the classroom and at the poker table.

By the time he graduated in 1937 with an economics degree, Kluges combination of skill and luck helped him accumulate about $7,000 in winnings. (He has since gratefully bestowed over $100 million on his alma mater.) Upon graduation, Kluge went to work at Otten Brothers Co., a small paper company in Detroit. Within four years, he had doubled the firms sales, earning a 30 percent share of the company as well as its presidency.

After serving in the Army during World War II, Kluge began investing his hoard, purchasing Silver Spring, Marylands WG A Y radio station in 1946 with a partner. Over the next decade, Kluge honed his business skills with a series of wide-ranging ventures. Although Kluge didnt seem enamored with any particular industry segment, several themes began to emerge. First, he was attracted to businesses with high cash flow and low capital requirements. In 1951, for example, he launched a food brokerage. Essentially a manufacturers representative, he sold goods to supermarkets on a flat 3 percent commission. His brokerage eventually became the largest in the Baltimore-Washington, D.C., metropolitan area, and Kluge maintained a 25 percent interest in the highly profitable business through the early 1980s.

Another hallmark of Kluges business strategy was his liberal use of debt. Metromedia routinely maintained a higher than average debt-to-equity ratio. Though this tactic was criticized sometimes stronglyKluge never got burned. He used leverage in many crafty ways, often as a means to another favorite end, tax avoidance. According to a 1984 Forbes article by Allan Sloan, examples of his anti-tax shuffles included a complicated sale-leaseback of most of the companys outdoor advertising division [and the purchase of] depreciating rights to 100 million of New York City buses and subway cars. Kluge even moved Metromedias headquarters from New York City to Sea-caucus, New Jersey, to avoid the former metropoliss high taxes.

Examples of Kluges strong contrarian bent have cropped up throughout his career. For example, whereas other venture capitalists shunned the hotel industry in the early 1990s, Kluge sunk at least $150 million in an aging Manhattan hotel. The most significant aspect of Kluges contrarianism was that it was more often successful than not.

A final noteworthy facet of Kluges strategy was his passion for cost-cutting. Although he spared no expense on his own lavish lifestyle, strict on-the-job cost controls were sometimes criticized as cheap. In her captious 1988 book Too Old, Too Ugly and Not Deferential To Men, Christine Craft, an anchorwoman at one of Metromedias midwestern television stations, attributed a general lack of upkeep to corporate stinginess. Notwithstanding such criticism, Kluges combination of strategies served him well.

The budding entrepreneur laid the foundation of what would become a billion-dollar media empire in 1959, when he and a group of investors bought Paramount Pictures 24 percent interest in Metropolitan Broadcasting Corp. for $4 million. The companys interests included independent television stations in New York and Washington, D.C., (two of the countrys leading markets) as well as four radio stations. After assuming leadership of the company, which had been spun off from Allen B. DuMont Laboratories in 1955, Kluge took it public, retaining a 12 percent stake. At the time, Metropolitan was generating about $12.4 million in annual revenues, but its profits were practically nil.

Renamed Metromedia, Inc., in 1961, the company specialized in independent television stationsthose not affiliated with one of the three national broadcasting networks. Although some observers judged several of his purchases overpriced (especially since independent television was widely construed as a dead end), the stations were bargains in comparison with their network-affiliated counterparts. Once Metromedia accumulated the FCC-mandated limit of seven television stations, Kluge started trading up to stations in ever larger and more influential markets.

But Metromedias upward climb was not uninterrupted. The company struggled through the 1960s, when many of Kluges ideas proved too far ahead of their time to suit shareholders and analysts. Hoping to build a multimedia empire, he bought a magazine, bus and subway poster concessions, and attempted to form a fourth television network. (His concept, in fact, came to pass in the form of Rupert Murdochs News Corp. Ltd.) The extra-curriculars exacerbated six particularly lean years that started in 1969. When, in 1971, one reporter snidely wrote that he had turned a helluva company into a shelluva company, Kluge launched a rarely suspended personal press blackout. A mid-1970s recession took Metromedia to its 1974 nadir, when the companys stock sunk to $4.25 a share. Kluge tightened cost controls and shed the magazine and other extraneous holdings.

His notoriously good luck combined with Metromedias retrenchment to pull the company out of its slump shortly thereafter. In 1976, advertisers loosened their purse strings to the benefit of independent as well as network television stations. Metromedias revenues grew by one fourth that year, and its profits doubled. By 1980, the companys $450 million annual revenues were generating $55 million in profits.

Kluge the contrarian eschewed the hoopla surrounding cable television and focused instead on programming in the late 1970s and early 1980s. Although his own production efforts proved less than successful, Kluge was good at picking off top shows going into syndication. He even applied his contradictory logic to programming, employing counter-programming instead of going head-to-head with network schedules, Metromedia stations slated something different, like putting a sitcom against the evening news. During this period, the company acquired the rights to perennially popular syndicated shows like All in the Family and M*A*S*H, as well as first-run syndicated programs like Thicke of the Night and Too Close For Comfort. Metromedias success was reflected in its stock price, which skyrocketed from $4.50 in 1974 to over $500 by 1983.

By the early 1980s, Metromedia had stations in seven of the top ten markets: New York; Washington, D.C.; Los Angeles; Boston; Houston; Minneapolis-St. Paul; and Cincinnati. His stable of stations was outranked only by network holdings. The company also held the legal limit of 14 radio stations, The Foster& Kleiser billboard company (which had 42,000 billboards by 1982), the Harlem Globetrotters exhibition basketball team, and the Ice Capades figure skating show.

Kluge and a group of investors took Metromedia private late in 1984 with a $1.6 billion deal. The leveraged buyout (LBO) borrowed the vast majority of the money needed to pay off shareholders, pledging future cash flow and projected asset sales to retire the accumulated debt. The terms of the transaction offered public stockholders about $40 per share ($30 in cash and $10 in debt): an 80 percent premium over its normal trade. Although the deal went through, Kluge found himself in a difficult positionhe was expected to begin liquidating Metromedia s holdings in order to meet the terms of his heavy debt load. However, he was met with a stagnant market, where low prices for his prime media properties compelled him to sit tight. With the help of famed (and later discredited) junk bond wizard Michael Milken, Kluge bought some time with a more favorable debt refinancing.

The Metromedia garage sale started in 1985, after Capital Cities Communicationss acquisition of the American Broadcasting Corporation heated up the media market. The company raised $2 billion with the sale of six television stations to Rupert Murdoch and the seventh to the Hearst Corporation. In 1986, Metromedia added over $1 billion more to its coffers with the sale of the billboard subsidiary, nine radio stations, the Globetrotters, and the Ice Capades.

Kluges contrariety helped boost that already massive payoff by billions. Against a prevailing opinion that gauged a ten-year payoff period for earphone investments, he had guided Metromedias expansion into cellular telephony with a $300 million investment in 1983. Writing for Forbes in 1990, Vicki Contavespi called it one of Kluges best bets. He sold most of those properties to Southwestern Bell for $1.65 billion and divested the rest for $3 billion in 1990. Within less than two years, the LBO and subsequent selloffs transformed Kluges 25-percent, $250-million interest in the publicly owned Metromedia into a multibillion personal fortune and made him Americas second richest individual.

Kluge began using the proceeds of his media selloff to amass a restaurant empire. In 1988, Metromedia bought the Ponderosa Steak House chain from Asher Edelman. Edelman had bought the 20-year-old business barely a year before, but bailed out to relieve himself of the hefty debt incurred during the LBO. Kluge then bought Dallas-based USA Cafes, operators of Bonanza steakhouses, from the founding Wyly brothers for $83 million in 1989. These two chains formed Metromedia Steak-houses Inc.

The steak segments top two chains were very different. Ponderosa was concentrated in the Midwest and was dominated by company-owned units. Bonanzas stronghold was in the southwest, and the chain had operated as a pure franchiser, with only two company-owned locations. After an initial period of criticismboth from Bonanza franchisees and restaurant industry observersseveral major Bonanza franchise owners converted to the Ponderosa format. There did not, however, appear to be a concerted effort to compel a wholesale changeover. Metromedia also acquired S&A Restaurant Corp., franchisers of the Steak and Ale and Bennigans chains to his stable of steak shops. These more upscale steak restaurants were operated separately from the budget chains, as S&A Corp.

Although Kluge was said to have invested over $1 billion in the 1,000 units, they lost more than $190 million from 1989 to 1994. To top it off, by 1993 Ponderosa had slipped from number one to number two, and Bonanza dropped to sixth place in annual sales. Industry analysts blamed the problems on everything from high competition to scanty capital improvements, but no one seemed to know how to turn them around.

Kluge entered a completely different milieu in 1988, when Orion Pictures Corp. was threatened with a hostile takeover from Sumner Redstones National Amusement Corp. Orion was then headed by Arthur Krim, who called on friend Kluge to act as a white knight. Kluges investment of $78 million not only staved off the threat, but gave him a 70 percent interest in the company by the end of the year. But in spite of producing award-winning films like Platoon, Silence of the Lambs, and Dances With Wolves, Orion ran into trouble in the late 1980s. A string of box office bombs combined with Orions heavy debt load ($500 million debt to $485 million in annual sales) to drive the company into bankruptcy by the end of the 1991. Orion emerged from bankruptcy in 1992, but lost $250 million from 1990 to 1994.

In an effort to maintain the studios viability, Kluge took the unusual step of merging it with Actava Group, maker of Snapper lawn mowers, and Metromedia Inc., the groups investment arm, to form Metromedia International Marketing Inc. in 1994. This company expanded into Eastern European radio with the early 1995 acquisition of stations in Moscow and Bucharest.

Notwithstanding his apparent missteps into steakhouses and moviemaking, Kluge had his fingers in other, perhaps more promising pies as well. In 1990, he bought into a venture called International Telcell, an Eastern European cable television business. He also re-entered the outdoor advertising segment with Metromedia Technologies, the worlds only computerized billboard-painting company.

Having acquired International Telephone& Telegraph Corporations long-distance service division in 1989, Kluge used it as the basis of a strike into the long-distance telephone industry. The September 1993 merger of Metromedia Communications Corp. with Atlantas Resurgens Communications Group Inc. and LDDS Communications Inc. moved the resulting company into the top tier of long-distance providers, behind American Telephone& Telegraph Company, Sprint Communications Company L.P., and MCI Communications Corporation. With Kluge as chairman, the publicly held company (of which Metromedia Companies retained a significant stake) changed its name to WorldCom Inc. in mid-1995.

Some analysts speculated that Kluge would need to rid himself of the troubled restaurant and movie businesses to concentrate on the long-distance interests. But Joseph Weber of Business Week noted that Metromedias chief has often been quoted as saying he would be bored with just one business to worry about. There was no question that Kluge had the patience to

wait out lean timeshe juggled independent television stations that others derided as dogs for over two decades before cashing in. Whether the octogenarian still had the stamina to see these projects to profitability was another question entirely.

Although Kluge retained control of Metromedia into the mid-1990s (and the company had no mandatory retirement rule), his General Partner and Executive Vice President Stuart Subotnick emerged as a likely candidate for succession. Subotnick, who was nearly three decades younger than Kluge, had been with Metromedia since 1967. Thrust into the position of chief financial officer upon his superiors untimely death, Subotnick came to the fore in the early 1980s, when Kluge made him a member of his office of the president troika. In the late 1980s he had been one of the participants in Kluges failed LBO venture. Some sources say that he has been a chief (albeit behind-the-scenes) negotiator since the early 1980s. His status as a trusted personal tax advisor to John Kluge, as well as his survival of several upper management purges, appeared to clinch his role as successor.

Further Reading

Baldo, Anthony, Orion: Is Kluge Dancing with Wolves? FW, December 11, 1990, p. 14.

Bernstein, Charles, Conglomerate Menace Stalks Chains, Nations Restaurant News, August 14, 1989, p. 3F.

Billion-Dollars-Plus Buyback at Metromedia, Broadcasting, December 12, 1983, p. 2.

Brooks, Steve, Round Up: Can an East Coast Billionaire Corral a Herd of Restaurants into One Rugged Team? Restaurant Business, October 10, 1992, p. 86.

Carlino, Bill, Ponderosa Ropes Bonanza, Nations Restaurant News, September 11, 1989, p. 1.

, Wild Ride May Not Be Over for Metromedia and Its Steak Chains, Nations Restaurant News, February 25, 1991, p. 8.

Cohen, Laurie P., The Man with the Midas Touch Meets His Match in the Nations Steakhouses, The Wall Street Journal, January 3,

1994, p. 9.

Colodny, Mark M., Jack Kluges Other Divorce, Fortune, June 4, 1990, p. 265.

Contavespi, Vicki, Tips From Winners in the Game of Wealth, Forbes, October 22, 1990, p. 32.

Craft, Christine, Too Old, Too Ugly, and Not Deferential to Men, Prima Publishing& Communications, 1988.

Heuton, Cheryl, Kluges Return to Radio, MEDIAWEEK, April 3, 1995, p. 14.

Metromedia on a Roller Coaster, Newsweek, August 22, 1983, p. 48.

Noer, Michael, Stu Is Running the Show, Forbes, October 24, 1994, p. 284.

Reed, Julia, The Billionaire Who Just Wont Quit, U.S. News& World Report, June 28, 1988, p. 41.

Rudnitsky, Howard, The Plays the Thing, Forbes, June 8, 1981, p. 71.

Sloan, Allan, The Magician, Forbes, April 23, 1984, p. 32.

, Metromedia Revisited, Forbes, December 17, 1984, p. 32.

, Two Paths Diverged: Warren Buffett and John Kluge Investment Activities, Forbes, June 3, 1985, p. 40.

Sherman, Strat, Why Metromedias Stock Went From $4.25 to $175, Fortune, April 5, 1982, p. 96.

Weber, Joseph, The Millstones at Metromedia, Business Week, March 1, 1993, p. 68.

April Dougal Gasbarre

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Metromedia Companies

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Metromedia Companies