Barron's Features
What's the Deal?
Holders of John Kluge's Metromedia International want the
boss to show them the money
By ERIN E. ARVEDLUND
In the past 50 years John Werner Kluge has amassed a $10.9 billion
personal fortune, propelling him into the ranks of the 25 richest people on
earth. Along the way he has honed a legendary reputation for increasing the
value of broadcasting, cellular-telephone and cable-television assets, primarily
through his holdings in Metromedia Inc. and its successor concerns. But
shareholders in publicly traded companies controlled by Kluge rarely have
fared as well as the maestro. Since the mid-1990s, in fact, investors in three
Kluge entities -- Metromedia International Group, Metromedia Fiber
Network and Big City Radio -- have sustained monumental losses.
Consider Metromedia International, which is 20%-owned by Chairman
Kluge, 87, and CEO Stuart Subotnick, 59, Kluge's long-time lieutenant who
also serves as CEO of his primary investing vehicle, Metromedia Co.,
headquartered in East Rutherford, New Jersey. Metromedia International,
also based in East Rutherford, operates a disparate assortment of telephone,
Internet, paging, cable TV, broadband and radio assets in Eastern Europe,
the former Soviet republics and China, as well as Snapper, a U.S. lawn-care
equipment business. Since hitting a peak of 19.50 in 1995, its shares have
sunk as low as 1.90 and now trade around 2.15, reflecting an 89% drop in
shareholder value.
Last March the California Public Employees Retirement System, which owns
about 661,100 Metromedia International shares, named the company to its
Focus List of laggards singled out for "poor financial and corporate
governance performance." Calpers, the nation's largest public pension fund,
with assets of $152 billion, specifically cited the company's staggered board,
and a minority of independent directors.
Some of Metromedia International's largest holders also have turned up the
heat under Kluge and Subotnick, in an effort to compel management to
simplify the company's corporate structure and financial reporting, alter the
composition of the board and otherwise boost shareholder value. Elliott
Associates, a New York money manager holding about 3.5 million shares, or
4% of Metromedia International's 94 million shares outstanding, thinks the
stock is worth at least $9 a share, and has launched a proxy fight to force two
independent directors -- Robert A.G. Monks and Robert B. Holmes of Lens
Investment Management, the shareholder activist group -- onto the
insider-laden board. (The board's composition is detailed in MMG's Board of
Directors)
Among other things, Elliott and Lens are advocating the sale or spinoff of
Snapper, which the company identified as a "non-strategic" asset five years
ago, a $25 million stock-repurchase program, and the possible sale or spinoff
of various telecommunications properties.
In addition, Elliott has sued Metromedia
International to force the company to schedule
its 2001 stockholders' meeting. Just last week
the firm was granted an August 10 trial date
by the Delaware Chancery Court.
Snyder Capital Management, of San
Francisco, is Metromedia International's
largest outside holder, with 8.6 million, or 9%
of the company's shares, and President Alan
Snyder, too, has been agitating for the sale of
Snapper and the streamlining of the company's
telecom assets. "We're absolutely mystified
that after all this time they've not come up with
a plan acceptable to shareholders" to increase
the stock price, he says.
The real fear among these and other holders is that Kluge and Subotnick will
attempt to take Metromedia International private at a sorely depressed price,
and then resell the assets, pocketing a substantial premium. Indeed, Steven
Mizel, of Palm Beach-based Crandon Capital, alleged as much in a suit filed
against the company and its management in February, also in Delaware
Chancery Court. "Kluge and Subotnick intend to squeeze out Metromedia's
public shareholders to capture for themselves the true value of Metromedia's
communications assets," the suit charged. Since the mid-1990s Mizel has
tangled successfully with a number of public companies in an effort to get a
fair shake for minority holders. His holdings in Metromedia International could
not be determined, and his lawyers declined to comment.
To date, Kluge and Subotnick have been relatively unresponsive to
shareholders' pleadings. Last November the board said it would "evaluate
alternatives" to separate Snapper, Metromedia China and the company's
Eastern European radio and cable businesses from its Russian and Eastern
European telephony assets, which presumably could mean the sale or spinoff
of some or all of these properties. In March the company hired ING Barings
and Salomon Smith Barney to advise it on pending deals, and in April
Subotnick and others met with representatives of Elliott and Lens, although
the talks produced no resolution.
Then, in May, Metromedia International suspended its quarterly 90-cent
dividend on its 7.25% convertible preferred stock, a move sharply criticized
by Lens. "We believe management yet again is showing callous indifference to
the interests of its stockholders," said Richard Bennett, a principal with the
company, which is based in Portland, Maine.
But some other shareholders are giving Kluge & Co. the benefit of the doubt,
maintaining that the dividend's disappearance could signal a restructuring plan
is imminent. "Discontinuing the dividend makes it easier to negotiate," says Jay
Burnham, of Reprise Partners, a San Francisco hedge fund that holds
preferred shares.
Earlier this month Metromedia International said it was "continuing to work on
the restructuring, but has not yet finalized these plans." The company did not
return Barron's calls, nor respond to a written list of questions.
For veteran Kluge-watchers, Mizel's allegations can't help but conjure up
bitter memories of the $1.2 billion leveraged buyout of Metromedia Inc. in
1984. At the age of 70, a time when most people think about retirement,
Kluge, whose name is German for "clever," took the company private and
then set about liquidating its assets. He and Subotnick sold to Rupert
Murdoch the TV stations that later formed the basis for News Corp.'s Fox
cable network, and Bernard Ebbers bought Metromedia's long-distance
business, which he then built into WorldCom. In all, Kluge, a German émigré
who launched his empire with the purchase of a Maryland radio station for
$15,000 in 1946, made roughly $8 billion from this complex string of
transactions. But Metromedia's public holders saw none of that bounty, as
they were bought out at about $40 a share -- a mere fraction of the
company's true value and the stock's onetime high of $560.
Metromedia International, which re-emerged in 1995, was carved out of
Kluge's privately held company. In many ways Kluge has tried to replicate
overseas his original broadcasting empire. The company owns or has joint
ventures in everything from radio stations in Budapest to dial-up Internet
services in Moscow to cable-TV outlets in Kazakhstan. What it lacks is a
Wall Street following; according to Elliott's proxy statement, the company
hasn't been covered by a single brokerage analyst since June 1999. In the
meantime, its market value has dwindled to $202 million.
Ironically, while its shares withered, Metromedia International's fundamentals
have improved. In 2000 the company reported revenues of $312.8 million,
compared with total revenues of $265 million in 1999. EBITDA, or earnings
before interest, taxes, depreciation and amortization, climbed to $44 million,
from the prior year's loss of $24 million, and net losses narrowed to $39
million, or 42 cents a share, from $156 million, or $1.92 a share. Moreover,
the number of subscribers grew to 1,067,890 last year, up 33% from 1999.
In this year's first quarter, revenues increased 7%, to $86.8 million. EBITDA
rose to $6.9 million from $6.1 million a year ago, although net losses climbed
37%, to $27.7 million.
Elliott Associates values the company's operating segments at $1.23 billion,
based on current multiples for competitors United Pan Europe
Communications in cable TV, and Toro in the lawn-care business. Adding in
$66 million of cash and subtracting debt of $252 million leads to an implied
equity value of $1.044 billion, or $9.68 per share.
To be fair, not all investors agree with the dissidents' objections or
recommendations. "We're a long-term investor, and to us, a lot of the
'problems' with the company are based on short-term considerations," says
William Stotz, a managing director with Staley Capital Advisers, a $200
million fund with two million Metromedia International shares. Selling Snapper
now wouldn't maximize long-term value of the asset, he believes.
Moreover, Stotz doubts Kluge would be able to snatch the company for a
bargain-basement price, because News Corp. owns 9% of the stock. "It
would be difficult for Kluge to do that with Murdoch as a shareholder," he
says.
Just the same, Subotnick and other executives seemingly have little incentive
to invigorate Metromedia International. Top management isn't even
compensated by the company. The officers are paid by Metromedia Co., to
which Metromedia International last year remitted a management fee of $3.75
million.
Problem children
Metromedia International is by no means
Kluge's only problem child. Metromedia
Fiber Network, which installs and leases
bulk bandwidth to city-based enterprises,
has seen its shares topple from a high of 50
last year to just above $1. With a market
value of $770 million and long-term debt of
$2.6 billion, the company must close a bank
loan or face a liquidity crisis.
Big City Radio is in similarly dire straits.
Seven years after its founding, the operator
of New York's only country-music station,
Y-107, faces a cash crunch that even its
switch to Hispanic radio couldn't cure.
The future of these companies ultimately rests with Subotnick, Kluge's
heir-apparent, although some holders carp that both men pay more attention
to Major League Soccer, which they backed with Philip Anschutz and Robert
Kraft, fellow mega-rich entrepreneurs.
Subotnick's other passion is horse-racing, and his colt, Balto Star, had long
been a disappointment until he was gelded and then qualifed to run in the most
recent Kentucky Derby.
"If you're going to go along for a period of time with a horse who is not going
to perform, it is better to bite the bullet and move on," Subotnick said at the
time. In spite of his promise, Balto Star finished last.
Metromedia International's long-suffering holders might beg to differ with
Subotnick, however. They have no intention of moving on, they say, until
Kluge and Subotnick bite the bullet and take demonstrable steps to recognize
the company's true value. |
