Metromedia

"Under the terms of his LBO loans, Kluge was required to break up Metromedia and sell off the pieces to liquidate the debt in short order. It quickly became apparent, however, that it would not be feasible to peddle the assets quickly at premium prices. The problem was partly that poten¬ tial acquirers were constrained by Federal Communications Commission (FCC) limits on the number of stations they could own. Faced with pos¬ sible default on his loans, Kluge turned to the investment bank Drexel Burnham Lambert for a new financing package that granted him addi¬ tional time to complete the asset sales."

"Based on experiences such as these, Kluge makes no bones about the benefits of a lucky break: “The greatest factor in my life—and I know entrepreneurial people don’t want to express it, they think it diminishes them—but luck plays a large part.”20 He recalls that it was only through a chance encounter with an acquaintance that he learned of the opportu¬ nity to acquire the remnants of the old Du Mont television network in 1959. That transaction launched the development of Metromedia into America’s largest group of independent (non-network-affiliated) televi¬ sion and radio stations."

"Leveraged buyouts started to fill the gap, even though such transactions had previously relied on the private “mezzanine” market—an arena in which lenders received “equity sweet¬ eners,” such as warrants, to compensate for the substantial risk of failure in a venture with extraordinarily high levels of debt. In the high yield mar¬ ket, no such sweeteners were offered, meaning that lenders shouldered a large share of the risk without participating in the potential gains. Metro¬ media was not the first leveraged buyout to tap the high yield market, but it represented a watershed by virtue of its size."

"Federal law forbids any noncitizen from owning TV stations, so Rupert Murdoch became a naturalized U.S. citizen in 1985 and quickly set about assembling a formidable media empire. He brazenly bought up some of the crown jewels of American media, such as the 20th Century-Fox movie studio. And amid the sneers of skeptics, Rupert launched a fourth U.S. broadcast network, the Fox Broadcasting Company, challenging the dominance of ABC, CBS, and NBC. After buying Metromedia’s TV stations, securing a foothold in key markets, he enlisted as CEO Hollywood heavyweight Barry Diller, who crafted a strategy around younger audiences and unconventional shows like *The Simpsons* and *Married… with Children.* Fox defied the odds and reshaped the American television market in the process. I learned from Rupert’s approach—aggressive and direct, the kind of competitor who was deadly because he was so quick to draw and fire. He tackled challenges head-on—whether from regulators, competitors, or his own team—and always found ways to navigate around obstacles. And he’s never, ever been afraid to buck the system. I respected that."

"Rupert had borrowed close to $5 billion from banks to acquire some pricey new properties, including the iconic 20th Century-Fox movie studio, the Metromedia broadcast TV stations, and a bunch of consumer and trade magazines owned by Ziff Davis. He had defied conventional Wall Street wisdom and launched a fourth broadcast network in 1987. Then in 1988, he pledged $3 billion to buy Triangle Publications, which published *TV Guide*, the largest and most profitable weekly at the time."

"Just as I had with the *Movie of the Week* at ABC, I was again starting all alone to try to establish a new television network. There I was with my big idea, my theory that there ought to be an alternative to CBS/NBC/ABC. I knew instinctively that there should be more options than three look-alike networks and wasn’t daunted by how many tries before had failed. I just knew it was time to try this. But how to turn that blue-sky idea into an actual plan? We now had this backbone of Metromedia stations, but how would we find enough other stations to be viable, to cover the rest of the country? What kind of programming would work? It wasn’t as if anyone was clamoring for a fourth network. Even though the three networks had basically morphed into one bland blob, there wasn’t any factual evidence to support starting one. But I was sure it could be done."

"Outside the three networks, Metromedia had the best station group in the United States, covering 25 percent of the U.S. population. I was astonished that it might be for sale. I told Murdoch that when I was at Paramount, we had tried to launch a fourth network and that, aside from the economics, our biggest hurdle was not having a big broadcast group to be the backbone of a network service. I told Rupert that if we could ever buy these stations, they could be the catalyst in my longtime dream to compete with the big-three broadcasters. There is no dog with hearing as sharp as Rupert Murdoch’s when opportunity calls. It took him less than a second to say, “Ha! Let’s go after this!”"

"Between our lunch and the time Murdoch finalized buying into Fox, he’d gone to Australia, and then on his way back to New York stopped for two days in L.A. He called and I invited him to come over to the studio for a chat. And, here’s where my North Star of serendipity once again showed up: three seemingly disparate events threaded themselves into the opportunity of a lifetime—at least my lifetime. First, that particular day was Michael Milken’s annual investors’ conference, called by some the Predators’ Ball. Milken was at that time the biggest financier of companies in the United States. He had previously called to say he had just financed John Kluge’s buyout of public shareholders at Metromedia, which owned six blockbuster television stations. They wanted to have a reception away from the place where the conference was being held, and Milken asked, as a favor, if I would give them a soundstage to have it on. The afternoon of that day, Murdoch arrived in my office. And finally, as soon as Rupert sat down in my conference room to talk, my assistant buzzed me to say that Mike Milken and John Kluge were in my reception room to say hello before their party."

"Working from a Los Angeles office, Milken had created a $125 billion pool of capital that had helped tiny companies swallow giants and permitted obscure executives to gain control of world-famous busi- nesses. So effective was his operation that a mere statement that Milken believed he could raise a financial war chest in pursuit of a particular corporate quarry—a so-called "highly confident" letter—could cause panic at the company targeted for takeover. Secretive, feared by competitors, and closely monitored by securities regulators, Milken already played an enormous role in the communications industry. During his time at Drexel, he channeled some $26 billion into MCI, McCaw, Metromedia, Viacom, TCI, Time Warner, Turner, Cablevision Systems, News Corporation, and other cable, telecom, wireless, publish- ing, and entertainment companies."

"Now McCaw told Milken that McCaw Communications wanted help to buy more cellular licenses. But Milken saw a new threat to Craig McCaw. "You're exposed," Milken said. McCaw was trying to grow two capital-intensive businesses at once while facing deeper-pocketed competitors on both fronts. He couldn't grow in both cable and cellular for long. Milken warned McCaw that his company was too deeply in debt. There was an irony—the foremost apostle of debt telling Craig McCaw that his financial strategy was too risky. According to Perry, McCaw didn't show much reaction. He just took it in thoughtfully and said merely, "Hmm. Okay." But Milken was right. The Southwestern buyout of Metromedia's cellular business showed how the bigger boys were prepared to snatch licenses that McCaw needed. Previously, McCaw had been annoyed by industry talk that his company was spread thin. To his face, the chair- man of PacTel had called his company a "house of cards." "I was tired of hearing about how much leverage we should take," McCaw says. Hearing the same message from Milken gave it a new urgency; it "hit McCaw right between the eyes," Stanton said later. McCaw had to focus his company on one business or the other."