From today's (Jan 14) LATimes
Tuesday, January 14, 1997
Company Town
Who'll Pay for a Media Mogul's Metromedia?
By CLAUDIA ELLER
Billionaire John Kluge, with frustrated shareholders
breathing down his neck, wants to unload the entertainment
assets of his publicly traded Metromedia International Group
and has held exploratory talks with a few parties, including
Morgan Creek Productions.
Sources say Kluge wants to focus exclusively on the
company's core business: telecommunications in Eastern
Europe, Russia and China.
Kluge may have been inspired by the recent $1.3-billion
sale of MGM, but judging from the lack of action on some
other established movie companies such as New Line Cinema
and Castle Rock Entertainment, he may have a way to go
before investors warm up to the kind of price he has in mind
for his struggling operation: about $700 million.
Metromedia's Entertainment Group, the umbrella company
for Kluge's entertainment outfits, includes Orion Pictures,
Motion Picture Corp. of America, which produced "Dumb and
Dumber," and Samuel Goldwyn Co., which has an 850-title
film and TV library and owns the specialized movie chain
Landmark Theater Group with more than 150 screens in 52
theaters.
Financial sources say before Kluge can hope to fetch any
kind of premium for the group, he'll have to get Orion's
production and distribution operations up to speed so the
combined companies will be a more attractive asset to
investors. The once-vital studio, known for such hits as
"Dances With Wolves" and "Silence of the Lambs," has
essentially been inert since going through bankruptcy
reorganization in 1992.
Kluge's longtime trusted lieutenant, Stuart Sabotnick, who
runs the day-to-day operations of Metromedia, could not be
reached for comment Monday. Sabotnick has long insisted that
Kluge is a builder, not a seller, but discussions with various
parties suggest otherwise.
Media analyst Frederick Moran at Furman Selz said,
"Kluge has definitely engaged in informal discussions with
major entertainment companies, though he hasn't hired an
investment banker and there's not an official book" on the
company.
Sources say that although Kluge hasn't initiated any
discussions, in addition to meetings with representatives of
Morgan Creek, he's also talked with PolyGram chief Alain
Levy--though those talks have so far led nowhere--and
executives from at least one other entertainment firm.
* * *
Morgan Creek and PolyGram, both wanting to expand
their libraries and distribution capabilities, each bid for MGM
last year but lost out to Las Vegas billionaire Kirk Kerkorian,
who backed a management buyout of the studio for $1.3
billion. PolyGram had also made an earlier play to buy
Goldwyn but was upstaged in the eleventh hour by
Metromedia.
Sources said once MGM was taken off the market,
Morgan Creek--the producer of such films as the popular Jim
Carrey vehicles "Ace Ventura Pet Detective" and its sequel,
and "Robin Hood: Prince of Thieves," which starred Kevin
Costner--approached Metromedia and has been looking at the
company for the last four to six weeks, though price has not
been discussed. Morgan Creek executives declined comment.
One source with knowledge of preliminary discussions said
"nothing substantive has happened," primarily because Kluge is
looking for a lot more money than any of these parties are
willing to shell out, which is $500 million or less.
"Kluge is looking for a premium," said the source, noting
that the billionaire knows that in order to maximize the value of
the entertainment group, he has to "build it up and get it back
on stream . . . otherwise you're selling damaged goods."
Mark Manson, an analyst with Donaldson, Lufkin &
Jenrette, said that if Kluge can reinvigorate the entertainment
group with box-office hits, Metromedia's value can rise
dramatically.
That's a tall order given the highly competitive marketplace
and the high-risk, low-margin movie business.
Nonetheless, industry analysts say Kluge is confident that
eventually the entertainment group could retrieve between
$700 million and $1 billion, primarily because it boasts the
fourth-largest library in the world with 2,200 titles. A good
portion of that is the Orion catalog, which has such
Oscar-winning best picture titles as "Platoon" and "Amadeus,"
but also includes lots of "B" movies from the defunct American
International Pictures catalog.
Goldwyn is best known as a distributor of high-quality,
specialized films such as "Much Ado About Nothing" and "The
Madness of King George. Its TV library includes shows such
as "American Gladiators."
Moran estimates the value of the combined libraries to be
as much as $700 million, or $10 a share. Metromedia, he
contended, "is such an undervalued security with the stock at
$11 a share."
Those who know him say Kluge's sole objective in
shedding the entertainment holdings is to boost Metromedia's
stock price, which has been on a down slide at least since late
1995.
"Right now, Wall Street analysts and investors in general
view this as a hodgepodge of businesses," Moran said.
Moran said combining the entertainment assets with the
telecommunications business has created "a kind of clash that
hurts the company from a valuation standpoint."
A source close to Kluge agrees: "Metromedia is worth a lot
more money as a pure play in telecommunications. The
entertainment companies cloud it."
Metromedia's telecommunications business is centered on
Eastern Europe, Russia and China, where it has acquired
licenses and properties in wireless cable systems, mobile radio
systems, paging and international toll-call services and radio
and TV stations.
Kluge's original plan was to acquire film companies that
could feed programming content to Metromedia's cable
channels abroad. But sources say a number of factors have
convinced the billionaire that selling the entertainment assets
would be more beneficial than keeping them.
The still-active Kluge, 82, has a net worth of $7.2 billion,
ranking fourth on the latest Forbes 400 list.
Kluge made his initial foray into the film world a decade ago
as a favor to his friend, the late Arthur Krim, one of the
founders of Orion. Waging a fierce battle in 1988, he
succeeded in buying out Viacom Chairman Sumner Redstone's
shares in Orion for $204 million to gain control of the
company. After suffering from excessive overhead and a string
of box-office flops, Orion filed for Chapter 11 and
subsequently emerged from bankruptcy significantly pared
down and no longer a vital company.
* * *
In late 1995, Kluge acquired Motion Picture Corp. of
America, which produces low-cost films, for $22 million.
Months later he paid $115 million for debt-ridden Samuel
Goldwyn Co.
Last year, Kluge had also planned to buy Alliance
Entertainment Inc., a New York-based distributor of recorded
music, but scratched the $533-million stock deal in April 1996
after declining music sales cut Alliance's operating cash-flow
estimates.
Sources say Kluge had also considered buying MGM last
year, but the price he wanted to pay was too low. A source
close to Metromedia suggests that after MGM sold for $1.3
billion, "a lightbulb went off" in Kluge's head that his company's
library might be worth even a third of that.
The source also believes that another contributing factor to
Kluge's about-face strategy to focus on Metromedia's primary
business as a telecommunications company might have been
the lackluster numbers he saw on the music front, a la the
Alliance deal.
By June of last year, it was clear that Kluge wanted to keep
his two businesses separate, said the source, evidenced by the
structure of a secondary offering so that all of the proceeds
went exclusively to the telecommunications side.
As for the entertainment group, whose combined debt is
north of $200 million, a bank loan was secured through Chase
Securities (formerly Chemical Bank), giving the companies a
$100-million revolving credit facility for production and
distribution.
Copyright Los Angeles Times
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