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Is This The Last Hurrah For Chris Whittle?


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IS THIS THE LAST HURRAH FOR CHRIS WHITTLE?

Visitors to Christopher Whittle's elegant shingled summer home in East Hampton, N.Y., marvel at its peaceful setting. Beyond its sweeping lawns and the calm waters of Georgica Pond, a strip of sand keeps the Atlantic Ocean at bay. As Whittle puttered around the house on July 31, though, the surf might as well have been pounding on his doorstep.

The flamboyant media entrepreneur had just shut down yet another of his ventures, Medical News Network. And he was negotiating the sale of half of his only successful business, Channel One, to Goldman, Sachs & Co. Wall Street executives say Goldman was squeezing Whittle for every last nickel. With his businesses failing and his company bleeding, he seemed to have little choice but to accept the deal. Worst of all, the investment bank wanted Whittle to play no further role at Channel One.

ANOTHER COUP? Then, on Sunday evening, came a call from William F. Reilly, the chairman of K-III Communications Corp. Reilly told Whittle he was interested in buying Channel One, a satellite-TV service that beams current-events programs and commercials into 12,000 schools. He said he would offer more money than Goldman, and would keep Whittle on as chairman. Whittle spent the next four days in intensive talks at Reilly's offices. By Aug. 5, he was able to bring a $300 million offer from K-III to his board.

To his loyalists, it was another coup in Whittle's storied career: The 46-year-old executive and his partners will get sorely needed cash. Whittle will keep his place at Channel One. And with the well-financed publisher of New York and Seventeen magazines now in charge, Whittle can devote more of his attention to the Edison Project, his ambitious scheme to build a national chain of for-profit secondary schools. Says one friend, Porter Bibb, a media investment banker at Ladenburg, Thalmann & Co.: "Chris has once again demonstrated his superb salesmanship."

Like many things related to Chris Whittle, there is less to this deal than meets the eye. Executives close to K-III say Whittle will not run Channel One, despite his lofty title. "It's an honorary thing," says one executive. "He's going to be more like an outside consultant." Whittle plays a similar role at Edison: "Chris hasn't been involved at all in day-to-day activities," says Edison Chief Executive Benno C. Schmidt Jr.

Rather than staging a triumph, Whittle may have written a coda to his flashy but flawed rise. Without Channel One or Medical News Network, Whittle Communications LP has shrunk to a grab-bag of assets: a women's pro baseball team, the Silver Bullets; a distribution system for sampler products on college campuses; and medical publications such as Physician's Weekly. "You can draw your own conclusions," says one Whittle executive, who, like others, says he may soon leave the company.

For years, media mavens have debated whether Whittle is a visionary or a huckster--a New Age Marshall McLuhan or an old-time Elmer Gantry. With his ingenious schemes to get advertisements into books, doctor's offices, and classrooms, Whittle challenged the traditional precepts of ad-supported media. For a while, he was hugely successful. He lured big investors such as Time Warner Inc. and Dutch consumer-electronics giant Philips Electronics. And he built a stately Georgian-style headquarters in Knoxville, Tenn., which locals jokingly dubbed "Colonial Whittlesburg." Whittle Communications became a media powerhouse. And with Edison, Whittle branched out to become a voice in such high-profile issues as school reform.

Now that Whittle Communications is in disarray, employees and backers are struggling to figure out what went wrong. Some still see Whittle as a prophet who--if anything--was too far ahead of his time. "There are two kinds of pioneers," says Robert E. Hope, president of Whittle Events, invoking one of Whittle's analogies. "The ones who go out and fight the Indians to get the land. And those who stay home to build the fort. He says the ones who go out always catch the arrows."

FANCY FOOTWORK. Others think Whittle richly deserved the arrows. They say he has been disingenuous from the start--promising more than he delivered, most notably in Special Reports, a series of magazines and a video service for medical waiting rooms. In 1990, one former executive says, the company took out full-page ads in The New York Times and other newspapers claiming that Special Reports magazines reached 100 million people. Challenged on that assertion, Whittle executives later conceded that the number was inflated: The company estimated that each quarterly magazine reached 25 million readers, and multiplied it by four.

Such fancy footwork has bred an atmosphere of distrust toward Whittle on Madison Avenue. Some employees believe this has harmed subsequent ad-supported ventures, such as Channel One and Medical News Network. In an interview with BUSINESS WEEK, Whittle admits the ill-will hurt Special Reports, though he denies that it affected Channel One or MNN. "I would chalk up the problems with Special Reports to our execution," he says.

Equally important, say current and former employees, Whittle mismanaged his company. He plunged into three costly ventures--MNN, Edison, and the electronic version of Special Reports--when the company had barely $200 million in annual revenues. And he allowed costs to spiral out of control by hiring celebrities from government and journalism at lavish salaries. "The one thing to understand," says a former employee, "is that Chris has screwed everybody: partners, employees, schools, and advertisers."

That's a harsh judgment, and Whittle strenuously rejects it. With the exception of Time Warner and Philips, he says, his many partners over two decades have all done well from their association with him. Whittle acknowledges that he has had to lay off employees, but says he has paid generous severance. And Whittle notes that Channel One has re-signed the great majority of both schools and advertisers that tried the service. Any suggestion that he deliberately mistreated these constituencies, Whittle says, is "not fair and...not accurate."

NO RETURNS. Still, Whittle has left his share of scars. Time Inc., the publishing arm of Time Warner, plunked down $185 million for 50% of Whittle in 1988. Philips Electronics invested $175 million in 1992. Philips and another Whittle partner, British newspaper publisher Associated Newspapers PLC, also backed the Edison Project. Together with Whittle, they poured $40 million into the venture last summer. Even with the K-III deal, none of these investments has generated a return.

Indeed, Time Warner has steadily reduced its stake in Whittle and refused to bankroll the Edison Project. Executives familiar with the company say it has written off its entire $185 million investment. By comparison, Time's notorious failed magazine, TV-Cable Week, cost the company $47 million in 1983. Reginald K. Brack Jr., chairman of Time Inc., says the Whittle investment will result in no "material losses" for the company. But executives close to Time Warner say it contributed to the company's recent decision to replace Brack as CEO of Time Inc. Brack and other Time Warner executives flatly deny that Whittle had anything to do with his relinquishing the chief executive title.

Philips declined to discuss its exposure. But the company has benefited from the Whittle alliance in other ways. Its Magnavox subsidiary supplies the 350,000 TV sets that carry the 12-minute Channel One broadcast. And Edison plans to use more Philips products in its high-tech schools.

Despite their hefty losses, Whittle's partners were often distracted by corporate woes of their own, and they didn't intercede until last February, after Whittle closed down Special Reports at an estimated cost of $25 million. Philips installed one of its senior U.S. executives, Don F. Johnstone, as CEO of Whittle Communications. Johnstone says he cut $40 million in costs out of Whittle in his first two months on the job.

Whittle's corporate general partners may get some of their money back from the K-III deal. Executives familiar with the arrangement say Whittle will use the proceeds for three purposes: to pay down the company's roughly $100 million in debt; to offset the estimated $35 million cost of shuttering MNN; and to pay back the general partners. Time Warner and Philips each own 33.4%, while Associated owns 22.3%. Whittle, who is managing general partner, owns 8%.

By contrast, Whittle's limited partners--who range from company executives to longtime Whittle associates-- may not get a dime from the sale. Most of them aren't surprised: They say they haven't received any financial information since Whittle's profits began slipping about two years ago. Whittle doesn't report revenues or profits publicly. But with insiders putting the company's loss at $50 million in fiscal 1994, Whittle isn't making money for anybody. "Everybody has been living with the prospect of [getting nothing] for some time," says one limited partner.

The sad thing about Whittle's decline, say many employees, is that he dreamed up some profitable ideas. Take Channel One. The service encountered tremendous hostility from the educational establishment when Whittle rolled it out in 1990. But 8 million students now watch its fast-paced mix of information and ads. And Channel One has re-signed 99% of its schools, according to its chief executive, Ed Winters. What's more, Channel One's distribution system can be used for other programming, says Jeffrey T. Leeds, an investment banker who helped Whittle negotiate the K-III deal.

Channel One has had a more mixed reception on Madison Avenue. Two major sponsors, Sears, Roebuck & Co. and Burger King Corp., dropped out of the service during its last renewal period two years ago. But other major advertisers, such as Procter & Gamble, Pepsico, and Mars, renewed their participation. Winter says Channel One has signed more than $200 million in long-term ad contracts averaging 31/2 years. And executives close to the company say it has a 35% profit margin on revenues of slightly less than $80 million.

Still, employees say Whittle could have diminished the Channel One controversy if he had been less headstrong. Some argue that he should have tried to work with the National Education Assn. in designing the service. He didn't. And the NEA has made Channel One public enemy No.1 in its campaign against commercialism in schools. Last month, the group voted to authorize its local affiliates to lobby state retirement funds to divest holdings in companies that advertise on Channel One. K-III may also encounter management dissension at its new property. Executives close to the deal say Whittle told Winter about the talks only one day before K-III made its offer. Winter won't comment on that, but says he plans to stay on as president and CEO.

In other cases, Whittle was a victim of simple bad luck. With Medical News Network, for example, he had developed a valuable on-line service to help doctors stay abreast of new drugs and treatments in an era of rapidly advancing health care. Whittle was getting good results in a test with 5,000 doctors. And three pharmaceutical companies had tentatively agreed to buy ads on MNN for a total of $147 million.

But then came health-care reform, which shifted the focus in medicine from individual doctors to huge health management organizations. To account for that shift, say MNN executives, they would have to change the service's distribution. Also, facing the prospect of government reform, the drug industry has undergone a wrenching consolidation, which has thrown ad budgets into turmoil. To help pay for revamping the service, Whittle tried to sell a stake in MNN to Reuters Holdings PLC and one of the service's three drug advertisers. When both companies balked, Whittle pulled the plug.

BIG PARTIES. If Whittle was sometimes the victim of circumstance, though, his big-spending ways, such as his penchant for hiring celebrity executives, didn't help. Among those who were lured to the Knoxville headquarters: Hamilton Jordan of Carter Administration fame and William S. Rukeyser, former editor of Fortune magazine, who have both since left Whittle; and Lee Eisenberg, former editor of Esquire, who has struggled to remain useful as Whittle's operations shriveled. Sources say these executives were each paid between $400,000 and $500,000 a year. Former employees say Whittle's lavish practices extended to every corner of the company. To celebrate the launch of the electronic version of Special Reports, recalls a former executive, he threw parties in New York and Los Angeles costing $100,000 each.

Whittle defends his high salaries as a necessary tool to attract the best people. "Did that periodically get out of hand?" he asks, "Yes. Was it central to the problems of Special Reports and MNN? Absolutely not." Whittle also says his sprawling $55 million headquarters was appropriate for the company when its ventures were mostly print, and were based in Knoxville. Nowadays, Channel One is in Los Angeles, while the Edison Project is in New York. Whittle is seeking new tenants for the building.

One thing Whittle is not apologizing for is the Edison Project: "When you look back on all this, Edison will be the most important thing we've done." Indeed, the project can offer Whittle some hope. Edison CEO Schmidt says he has obtained tentative contracts to operate 24 elementary schools for municipalities ranging from Dade County, Fla., to Wichita to Bridgeport, Ohio. That's more than Schmidt expected, and it puts Edison on track to open its first 10 schools by September, 1995.

The trouble is, Edison needs another $50 million or so to actually run the schools. Schmidt has already spent $40 million to design a curriculum and market it to school districts nationwide. This fall, he and Whittle plan to raise more cash from both institutions and wealthy individuals. Schmidt says Edison can turn a profit and become self-financing after a couple of years. But even some former Edison board members are skeptical that Whittle will ever be able to make schools a profitable business. For one thing, Schmidt plans to make costly technological investments, such as networking computers at school with those in students' homes.

Observers have their doubts. "We've been trying to find ways to introduce technology into every classroom," says Joan A. Buckley, assistant director of the Educational Issues Dept. at the American Federation of Teachers. "We haven't been successful in that, let alone networking them into their homes," she adds. Schmidt counters that because Edison is a private enterprise, it can make more long-term investments in technology than local school districts, many of which face stiff public resistance to budget hikes.

In many ways, Whittle has more riding on Edison than any of his other ventures. Whittle acknowledges that some of his company's problems stem from the fact that he has spent so much time crusading for Edison. Also, sources say Whittle poured $20 million of his own money into Edison last summer, after his last effort to find outside investors came up short.

Whatever his investment in Edison, Whittle's personal resources are considerable. He amassed a tidy fortune when Time bought its stake in the company in 1988. Whittle's personal take was $40 million. And he hasn't hesitated to spend his money. In addition to his East Hampton house, Whittle owns a townhouse off Fifth Avenue and a meticulously decorated apartment in New York's fabled Dakota. Friends say the townhouse and summer home each cost more than $10 million. Whittle also owns a place in Knoxville, and sold his farm in Vermont.

GLOBE-TROTTING. Friends say his lifestyle has become more baronial since he married Priscilla Rattazzi, the niece of Italian industrialist Gianni Agnelli, in 1990. A few years ago, he bought and expensively decorated the Knoxville house to entice Rattazzi to spend more time there. Despite that, Rattazzi spends most of her time in New York. So Whittle keeps up a grueling schedule of commuting between Knoxville, Manhattan, and East Hampton. Throw in trips to Channel One's studios in Los Angeles and overseas pilgrimages to meet investors, and Whittle's schedule rivals that of any globe-trotting mogul.

Despite all the adversity, Whittle's friends say he seems newly energized these days. Perhaps scrambling to save his company is the supreme challenge for a supreme salesman. And he may yet stage a comeback. For now, though, Chris Whittle's remarkable odyssey has taken a turn for the worse. It will take more than a spellbinding sales pitch to bring him back.THE WHITTLE FILE

AGE: 46 BORN: Etowah, Tenn.

EDUCATION

B.S. in American Studies, University of Tennessee

PROFESSIONAL

-- Co-owner (with Phillip Moffitt),Esquire magazine (1979-83)

-- Chairman and general partner, Whittle Communications and its predecessor company (1986-present)

PERSONAL

-- Married Priscilla Rattazzi in 1990

-- Has a son and a daughter

-- Keeps homes in Knoxville, New York City, and East Hampton, N.Y.

Mark Landler in New York, with David Greising in Chicago and Maria Mallory in Atlanta


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