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The Millstones At Metromedia


The Corporation

THE MILLSTONES AT METROMEDIA

It has been said that John W. Kluge has a golden touch. The wily 78-year-old owner of Metromedia Co. has a knack for buying slumping businesses, nurturing them, and then selling them at their peak. That's what he did with the seven independent TV stations he sold to Rupert Murdoch in 1986. More recently, he has been selling off his cellular phone holdings. All told, Kluge has pocketed some $5.4 billion from such deals over the past six years.

Now, Kluge is setting out to build a national long-distance network that could compete with such giants as American Telephone & Telegraph, MCI Communications, and Sprint. His Metromedia Communications Corp. is already the fifth-largest long-distance carrier, with $400 million in annual revenues. But it has a long way to go before overtaking even No.3 Sprint Corp., which has annual long-distance revenues of $5.7 billion.

In January, Kluge took a significant step in that direction when Metromedia, based in East Rutherford, N.J., announced a tentative merger between its long-distance company and Atlanta-based Resurgens Communications Group Inc. Kluge hopes to gain market share by offering cheaper long-distance service to small and midsize businesses. He'll likely ignore the residential long-distance market, which requires expensive consumer advertising campaigns that would push up rates.

BIG BET. Building this new empire will take time and concentration. Problem is, deep troubles at Metromedia's other businesses--restaurants and moviemaking--demand much of Kluge's attention. Metromedia's restaurants, which accounted for more than half of estimated 1992 revenues of $2 billion, are ailing. The company's budget steakhouse chains, Ponderosa and Bonanza, have lost $190 million since 1989.

And though Kluge owns only half of Orion Pictures Corp., the studio is giving him a full share of trouble. Orion, which emerged from bankruptcy last November, needs a big capital infusion to become a major Hollywood studio again. Kluge has already poured $300 million into Orion and personally guaranteed another $300 million in bank debt but seems loath to invest much more cash.

Fixing the restaurants is a top priority. When Kluge acquired the Ponderosa chain in 1988 and the Bonanza chain in 1989, he was betting that low-priced steakhouses would soar in popularity, thanks to budget-minded families. It hasn't worked out that way. Restaurant-goers have turned up their noses at the cafeteria-style decor and cheaper grades of beef at Ponderosa and Bonanza, despite a rock-bottom average tab of under $6. The demand for beef in restaurants has held steady, even though overall beef consumption is declining. But restaurant customers are demanding better grades of beef and upscale decor, and Ponderosa and Bonanza fall short on both counts. Metromedia's Steak & Ale and Bennigan's chains remain profitable, but they're losing market share.

LESS GRAVY. The customer flight is clearly hurting. Consultant Ronald N. Paul of Technomic Inc. in Chicago estimates that sales at 1,459 company-owned and franchised outlets have stagnated at $1.8 billion a year over the past three years. Even privately held Metromedia, which doesn't publish results, admits it is having a rough time. According to the company, cash flow from the steakhouses dwindled to a paltry $500,000 in the fiscal year ended in February, 1992, from $30 million in 1990.

While Kluge declined to be interviewed, Stuart Subotnick, Metromedia's 51-year-old chief operating officer, acknowledges "some problems" in the restaurant business. But he insists that the idea behind the restaurants--an economical dining option for families--remains sound and will eventually pay off. To speed that along, Metromedia is spending $26 million--$70,000 at each company-owned restaurant--to update Ponderosa's menus and western-theme decor. Also coming up: better grades of beef. The price will remain under $6.

Analysts wonder whether Metromedia, with its experience in high-tech, nonconsumer businesses, has the marketing savvy to repair the restaurants. Says Roger Lipton, managing director of investment-banking firm Ladenburg, Thalmann & Co.: "There's nothing to lead me to believe that there's any sign of a turnaround happening."

The same can be said for Orion. Metromedia's chairman became a partner in the studio in 1988 at the request of Arthur B. Krim, a close friend and one of Orion's founders, who wanted to fend off a hostile takeover by Viacom. The studio sought Chapter 11 bankruptcy protection in December, 1991, after lackluster video sales and cost overruns on such bombs as Cadillac Man and Navy Seals resulted in a liquidity crisis.

ANGRY STARS. Now out of Chapter 11, the studio faces the huge task of regaining its past glory. Loyalist Woody Allen has abandoned the studio after making movies for it for 15 years. And Orion angered such stars as Kevin Costner and Jodie Foster when millions they were owed were tied up in bankruptcy court for nearly a year.

On top of that, Orion's balance sheet is still a disaster. The company's debt load is almost $400 million, with assets of about $600 million. For now, Orion's biggest revenue source is its film library, which includes 750 motion pictures such as Silence of the Lambs and Dances with Wolves. Thanks to video sales and foreign rentals, the library produced net cash flow of $175 million for the year ending February, 1993.

Under terms of the bankruptcy reorganization, however, all the cash flow after expenses goes to creditors for the next three to six years. That's especially bad news, since Orion will need an additional $300 million to finance a slate of 10 to 15 films in the next few years, estimates entertainment analyst Jeffrey B. Logsdon of Seidler Amdec Securities Inc. Few Kluge-watchers think he is willing to pump much more cash into the shaky studio, and he is believed to be negotiating with prospective investors.

Even with such daunting problems, Metromedia's executives say their boss is upbeat about the future, thanks in part to the Resurgens deal. Full details, including price, have yet to be disclosed, and Metromedia's managers are cagey about the specifics of their long-term strategy. But the deal, which is expected to close in March, would give Kluge a controlling 61% of the new company, which will bear Metromedia Communication's name and be publicly traded. The merger would create a company with $550 million a year in revenue and an estimated $40 million in profits--still a small player but with a national network of transmission facilities that can easily handle far more traffic.

MANY TARGETS. Analyst Craig W. Ellis of Wheat First Securities Inc. believes Kluge has big plans for the long-distance business. "This represents the first of what I expect to be a long line of mergers," he says. Ellis reckons there are some 90 small companies similar to Resurgens--some of which would be easy prey for Kluge.

Before he can bask in the glory that an expanding long-distance network may bring, Kluge has to repair Orion and his restaurants. A driven worker who keeps an apartment just above his office on Manhattan's Upper East Side, Metromedia's chief has often been quoted as saying he would be bored with just one business to worry about. With Metromedia's big upheavals in restaurants, film, and telecommunications, Kluge is anything but bored nowadays.KLUGE'S CHALLENGES AT METROMEDIA

RESTAURANTS

Metromedia must spruce up the image of its aging steakhouses, Ponderosa and

Bonanza. Fancier Steak & Ale and Bennigan's restaurants are faring better but

still losing market share

MOTION PICTURES

Orion Pictures, 50%-owned by Metromedia, recently emerged from bankruptcy. But

it needs capital to become a major studio again

LONG DISTANCE

The recently announced deal that would give Kluge 61% ownership of Resurgens

Communications Group marked the start of Kluge's expansion in the long-distance

phone market. But he must step up his pace of acquisitions if he hopes to take

on giants

DATA: BUSINESS WEEK

Joseph Weber in New York


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