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Here's To `Old Pals'


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HERE'S TO `OLD PALS'

Given the frenetic schedule H. Wayne Huizenga has kept over the last few months, you'd surely think his social life would take a backseat to his business interests. Not only did the stocky chairman of Blockbuster Entertainment Corp. embroil himself in the acrimonious battle for Paramount Communications Inc. by agreeing to merge with its eventual acquisitor, Viacom Inc.--he also took over the National Football League's Miami Dolphins.

For Huizenga, however, business and pleasure are often the same thing. So it's no surprise that his private BAC 111 jet touched down in Boston on Feb. 5 for the 50th birthday party of close friend A. Clinton Allen III.

Allen is the vice-chairman of fledgling Psychemedics Corp., a $6.6 million public company that conducts workplace drug-testing programs using samples of human hair. Allen also sits on the board of Blockbuster, which--thanks to Huizenga--is Psychemedics' biggest customer and shareholder. Also at the party were buddies John J. Melk and Donald F.

Flynn, chairmen of H2O Plus and Discovery Zone, respectively. Both are directors of Blockbuster and Psychemedics. Huizenga put money into H2O Plus. Blockbuster helped finance Discovery Zone.

Confused yet? Welcome to the "Old Pals' Club"--a tightly knit group of wealthy entrepreneurs and their offspring who have co-invested their way to controlling some of the hottest companies on Wall Street. Many of them owe their initial fortunes to Chicago-based WMX Technologies Inc., which 25 years ago they began building into the world's largest collector of garbage and chemical waste. (It used to be called Waste Management Inc.) But since the mid-1980s, several have stepped out on their own to create four other public companies that, when combined with WMX, have a market value of $26 billion. Based on their ownership stakes in all five companies, the Old Pals' combined net worth tops $1.6 billion. Add in a host of private ventures, and the group is worth tens of millions more than that (table).

Huizenga, one of Waste's founders, is by far the most illustrious of the crew. And Blockbuster, which he has guided to sales of $2.2 billion in six years, is the star of the loose federation of WMX offspring. But he owes much of his success to this exceptionally close cadre of friends and business associates. Part social club, part investment society, the group is a deep source of capital and business advice.

"NO RECEIVABLES." Peer Pedersen, a powerful Chicago lawyer and longtime club member, puts it this way: "Our collegial approach is quick and efficient. If we see an idea, we throw our energy and money behind it." In late January, they did just that. Pedersen persuaded Melk, Dean L. Buntrock (still chairman of WMX), and Flynn (a former Arthur Andersen & Co. accountant who for years was Waste Management's chief financial officer) to put $1.2 million each behind a new chain of Chicago-based urban grocery stores specializing in fresh produce.

Lately, however, the Old Pals' young offspring have been getting many of the big headlines. Most notable is Scott A. Beck, the 35-year-old son of Lawrence Beck, a WMX founding partner. Working as an investment adviser in early 1986, the younger Beck spotted a tiny Texas video chain called Blockbuster and by 1987 had persuaded Huizenga and others to invest in it. Then, with early backing from Melk, Pedersen, and Flynn, he bought Boston Chicken Inc. in 1992 and turned it into 1993's most spectacular initial public offering. Beck is thinking big: Now at only $42.2 million in sales, Boston Chicken is aiming to double its number of outlets, to 450, by yearend.

Flynn also backed the idea of his 26-year-old son, Kevin, to take over Discovery Zone in 1992. The innovative, 165-outlet chain of indoor playgrounds became another hot IPO last year. Then there's Melk's daughter, Cindy, the 31-year-old executive vice-president and creative director of cosmetics-store chain H2O Plus. She aims to boost sales from $27 million to $200 million by 1998. Slightly jealous of the hundreds of millions reaped by Scott Beck and Kevin Flynn via their public offerings, she, too, vows to go public "sooner rather than later."

The common thread tying most of the deals together is a fascination with service businesses that are able to spin out strong rivers of cash. "No receivables, no inventory, no manufacturing," is how Donald Flynn sums up the ideal company. High-tech Psychemedics is about as far afield as the group is willing to go. The company struggled for years to crack the drug-testing industry before finally making a profit last year. The Psychemedics experience has only reinforced club members' inclination to stick with what they know best: consumer-oriented service businesses.

COMFORT LEVEL. From Blockbuster to Boston Chicken, the group has displayed a talent for rapidly rolling out hundreds of company-owned and franchised outlets--and managing the growth without overheating. Club members credit WMX, which began as a collection of far-flung trash haulers and landfills, with teaching them how to manage a network of small operations. Blockbuster provided the real foundation in retailing, plus experience in real estate site selection and management. It's no coincidence that Blockbuster and Boston Chicken outlets are often positioned near one another. And the other chains have borrowed liberally from Blockbuster's expertise in retail computer systems and operations.

The club's biggest benefit, however, is its deep pool of capital. Take Blockbuster. Eager to ramp up the nascent video-rental chain in late 1987, Huizenga and the other directors were pmised to raise $8.4 million in new equity on Wall Street when the stock market plummeted on Oct. 19. "Our stock crashed and burned, but we still needed the capital," Flynn recalls. Enter Buntrock, Pedersen, and Huizenga's parents. Within days, the money was in the bank. Only a few months ago, H2O Plus was considering a $20 million private placement with institutions when Pedersen suggested Melk raise it all from the club instead. "I said: 'Let's just get our pals together,'" Pedersen recalls.

As close as the group is, not everyone participates in every deal. But each member typically gets a peek, usually through Pedersen, a conduit for many prospective investments. Huizenga, for example, hasn't yet offered his buddies any pieces of his growing portfolio of professional sports franchises. "You don't put friends in deals that don't give returns," he explains.

Trust within the network is key. Due diligence is often a friend's word. Faith comes from years of doing deals together--with few mishaps--and plenty of time spent socializing on golf courses, boats, and as neighbors in Chicago and South Florida. Pedersen recalls that Flynn broached to his friends the idea of an investment in Discovery Zone while yachting with them in the Mediterranean. "Someone else might not have touched this one," Pedersen says. "But I thought if it was good enough for Don, it was good enough for me." Huizenga agrees: "We've been together so long, there's a different level of confidence."

The training ground was Waste Management, which brought together a collection of tough entrepreneurs who gobbled up mom-and-pop companies while battling with regulators and weathering a string of price-fixing and environmental suits. "These guys were working like dogs," recalls Cindy Melk, who says she rarely saw her globe-trotting father. In an office nearby, John Melk reminisces that Waste's culture encouraged entrepreneurs. "You didn't need a degree or special qualifications, and you took on tremendous responsibility," he says. Buntrock is the only member of the club still active at WMX, although Flynn, Pedersen, and Peter Huizenga are directors and shareholders.

By the early 1980s, many Waste Management executives were becoming restless. Huizenga left in 1984 and built a portable-toilet and lawn-care business in Florida. That same year, Melk resigned to take up real estate in Chicago and Fort Lauderdale. Flynn began winding down in 1987. Although dispersed around the country, they stayed in touch. They also kept tabs on other professionals, such as Pedersen and Merrill Lynch & Co. investment banker Charles A. Lewis, whose firms did work for Waste.

"RINKY-DINK." Blockbuster, the first big deal, didn't exactly set off a stampede. "Video sounded pretty rinky-dink to me," recalls Melk, who was the first Waste Management alumnus (besides his father) Scott Beck contacted when he spotted the chain. Why? Melk had been head of Waste Management's international operations in London when the younger Beck came to board with him as a student. Beck quickly started trading silver futures--and Melk was forever impressed.

Melk eventually bought in, as did Huizenga, Flynn, and Pedersen. Huizenga, who had sold his toilet business back to Waste Management in the mid-1980s, became chairman, and Scott Beck went on to become Blockbuster's largest franchisee. In 1989, Beck mimicked Huizenga when his franchise group sold their stores back to the parent company for $117 million in Blockbuster stock. That stake helped Beck buy Boston Chicken in 1992.

Such wheeling and dealing among the club's private and corporate interests is common. Melk and Flynn, like Scott Beck, became Blockbuster franchisees to help the young company grow, only to sell the stores back later for big profits. Another longtime friend, George D. Johnson Jr., sold his Blockbuster franchises to the parent last August for Blockbuster shares valued today at $180 million. Blockbuster helped Flynn and his sons launch Discovery Zone by taking a 21.3% stake--since diluted to 19.6%--for $10.3 million, ahead of the public offering last June. Insiders hint that they may ultimately merge: Blockbuster has an option to gain majority ownership from Flynn.

GRANDDADDY'S GRIEF. Are the relationships too incestuous? Some think so. Boston Chicken has been hit with a shareholder suit charging that insiders--who had bought shares in private deals for as low as $2.97 a share--unfairly benefited from the IPO. The price shot to a first-day close of $48.50 a share from $20, and, because of huge demand, most individual investors got in at the higher price. The suit is pending. Meantime, a number of Blockbuster shareholders, unhappy with the Viacom merger price, have filed four suits to block the deal as it stands.

For the most part, though, the group's success--measured largely by Blockbuster--has silenced the critics. Other franchise owners contacted by BUSINESS WEEK aren't worried about the insider deals. And Wall Street largely appears enchanted with the coziness. Boston Chicken owes its current share price of about 44 (80 times future earnings) to Beck's connections. Says PaineWebber Inc. analyst Craig Bibb: "They rub off on each other positively."

They'd better. While it's clear that chains such as Boston Chicken and Discovery Zone are well financed and efficiently organized, they will face plenty of competition as they try to live up to Wall Street's expectations. PepsiCo's KFC is aggressively chasing Beck's rotisserie-chicken niche. And franchising king McDonald's Corp. has targeted Discovery Zone with a new unit called Leaps & Bounds. H2O Plus is growing nicely, but it has yet to turn a profit. It can count on Body Shop and others to give it a run for its money.

The granddaddy of them all--WMX--is having its own problems. Poor earnings of late have sent the stock down 36%, from a 52-week high of 39. And the Old Pals' Club has certainly had some flops. When Huizenga, Pedersen, and Buntrock dumped $10 million into oil tankers in 1979, they came up with nothing more than tax write-offs. More recently, Pedersen, Buntrock, and Lawrence Beck had to refinance Burnham Broadcasting Co., an owner of TV stations in which they each invested $3.5 million in 1983. By and large, though, the WMX crowd has cleaned up on its string of investments. It's hard to argue with a stock portfolio worth $1.6 billion.TABLE: THE WMX

CONSTELLATION

PUBLIC COMPANIES

COMPANY SALES NET INCOME

WMX $9.1 $452

TECHNOLOGIES billion million

Garbage and chemical waste disposal

BLOCKBUSTER $2.2 $244

ENTERTAINMENT** billion million

Video-rental chain, record stores,

movie studios, and TV production

DISCOVERY ZONE $56 $3

million*** million***

Children's indoor-playground chain

BOSTON CHICKEN $42.5 $1.6

million million

Rotisserie chicken restaurant chain

PSYCHEMEDICS $6.6 $953,108

million

Drug-testing service using hair samples

PRIVATE COMPANIES

H2O PLUS $25 Lost

million money

Cosmetics-store chain

SILVER EAGLE $31.2 N.A.

RIVERBOAT million

Joint-venture partnership operating a floating casino on the Mississippi

WJB TV $15 N.A.

million

Operates wireless cable systems in Florida

*All data for 1993 **Has agreed to merge with Viacom Inc. pending shareholder approval ***estimates

DATA: BUSINESS WEEK, COMPANY REPORTS

Richard A. Melcher in Chicago, with Gail DeGeorge in Fort Lauderdale, Fla.


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