Metromedia Company - Company Profile, Information, Business Description, History, Background Information on Metromedia Company

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History of Metromedia Company

Metromedia Company has emerged over the past decade as one of the largest private concerns in the United States, with varied interests in fields of technology, entertainment, telecommunications, and the restaurant industry. Guided by its founder and president, billionaire John W. Kluge, Metromedia has grown from a minor player in broadcasting to a major force in many areas of business. Throughout its history, the company's philosophies and business strategies have reflected the instincts and interests of Kluge, who is generally regarded as one of the richest individuals in the world.

John Kluge was born in Chemnitz, Germany. He and his family moved to the United States when he was eight years old, settling in Detroit. After a brief stint at Wayne State University, Kluge received a scholarship from Columbia and finished his schooling there. Even in college, Kluge's ambitious and risk-taking character was in full bloom. Kluge supplemented his scholarship money with income from three different jobs and skillful card playing. He graduated in 1937 and returned to Michigan, where he accepted a position with the Otten Brothers Company. He quickly acquired part-ownership of the company's paper conversion business.

With the advent of World War II, Kluge joined the U.S. Army, where he quickly rose to the rank of captain with the War Department General Staff in Military Intelligence. After the war, Kluge sold his interest in Otten Brothers and remained in Washington.

In 1946 Kluge purchased a radio station in Silver Spring, Maryland, for $15,000. Over the course of the next dozen years he acquired a number of additional FM radio stations, which at the time were regarded as an unappetizing alternative to AM stations. Over time, however, FM radio became the preferred medium for popular music and other programming and advertising revenue for FM stations rose in corresponding fashion.

By the mid-1950s Kluge's business activities began to take on a level of diversification that would be a hallmark of his for decades to come. In 1956 he and former competitor David Finkelstein merged their food brokerage businesses in Baltimore. In 1959 Kluge delved again into the field of broadcasting, acquiring a minority interest in the Metropolitan Broadcasting Corporation (formerly the Dumont Broadcasting Corporation), taking control and changing the company's name to Metromedia in 1960. Again, Kluge defied conventional wisdom, purchasing a number of independent VHF stations and ignoring stations affiliated with the three major networks. As Kluge's long-time business associate Stuart Subotnick noted in Electronic Media, "we do have a penchant for making passed-over visibles valuable." Operating under the banner of Metromedia, Kluge purchased and sold stations in progressively larger markets, trading up on a tax-deferred basis. Innovative programming, coupled with a lean operating style, enabled Metromedia to achieve operating margins that far outpaced those of stations associated with the major networks. At its height, the company boasted television stations in many of the country's major media markets, including New York, Los Angeles, Chicago, Dallas, Boston, Houston, and Washington, D.C.

In the 1960s Metromedia entered the realm of outdoor billboard advertising. The company acquired Foster & Kleiser, a regional outfit based in the western United States, as well as businesses in Chicago and New York. Metromedia's initial investment of $14 million in the industry enabled it to consolidate a variety of fragmented markets into an established national company. By the early 1980s Metromedia owned approximately 45,000 outdoor advertising displays in 19 major metropolitan areas.

Under the direction of Kluge, Metromedia also established a presence in a wide array of other areas of business and entertainment. Metromedia business interests have included music publishing companies; recorded music; direct mail advertising; television production and syndication, including the syndication of the Merv Griffin Show; Playbill magazine; the Harlem Globetrotters; and the Ice Capades.

The 1980s marked a dramatic shift in emphasis for Metromedia, as it divested itself of long-held concerns in advertising and broadcasting and launched itself into the new territories of telecommunications and the restaurant industry. This change in direction was due in no small part to a major change in the company's status. In 1984 Kluge took the company private through a leveraged buyout of the company's stockholders, a maneuver that cost him $1.6 billion. Armed with more than 90 percent ownership of Metromedia, however, Kluge was free to take the company in whatever direction he pleased.

Kluge sold his outdoor advertising interests in 1986 for more than $700 million in cash and preferred stock, a significant return on his initial investment of $14 million. He also sold his six independent television stations and one network station in 1986 for more than $2 billion. These stations, primarily purchased by Rupert Murdoch, served as a cornerstone of his fledgling Fox Broadcasting Company. In addition, Metromedia disposed of its radio broadcast holdings, divesting itself of nine stations and the Texas State Networks system through a management buyout of approximately $285 million.

During the early 1980s Metromedia began exploration of the cellular telephone industry. Intrigued by the business potential of the industry, Metromedia spent $300 million in the purchase of paging companies. The company quickly moved to consolidate its holdings, creating the country's largest paging and cellular business. Metromedia sold the majority of its holdings in the cellular industry to Southwestern Bell in 1986 for $1.3 billion, but Kluge remained a significant player in the industry. In 1990 and 1992 Metromedia sold its remaining cellular holdings for an additional $2.2 billion.

John Kluge also established a presence in the film industry during the 1980s, acquiring majority ownership of Orion Pictures Corp. in 1988. This was done at the behest of Orion co-founder Arthur B. Krim, a friend of Kluge's. Krim and the rest of the Orion group were concerned about the takeover threat of Viacom and its chairman, Sumner Redstone. As Kluge himself has admitted in Electronic Media, the investment in Orion was not exclusively a business decision: "This was an investment that was made as a personal favor in a white knight situation."

Orion remains a troubled studio, however, despite significant contributions from Kluge. The company filed Chapter 11 bankruptcy proceedings in December 1991. In 1992 the company emerged from bankruptcy with a debt of approximately $400 million, and the terms of the bankruptcy reorganization, which earmarks all excess cash after expenses to creditors for the next three to six years, have hamstrung the company in its efforts to create new product. Despite the company's need for capital, most observers feel that Kluge is reluctant to sink any more cash into Orion.

Metromedia made several key acquisitions in the late 1980s, purchasing the Ponderosa, Bonanza, Steak & Ale, and Bennigans chains. Ponderosa and Bonanza are operated by Metromedia Steakhouses Company, L.P., and Steak & Ale and Bennigans are operated by S&A Restaurant Corp. While the Steak & Ale and Bennigan's chains have remained profitable (if susceptible to decreasing market share), the Metromedia Steakhouses chains have lost $190 million since 1989.

Both Ponderosa and Bonanza had historically served as low-priced alternatives to other restaurants, offering customers low prices in exchange for cafeteria atmosphere and cheaper grades of beef. Industry trends, however, indicated that both chains were losing customers. Moreover, Kluge's almost simultaneous purchases of the two long-time competitors aroused fears on both sides of forced conversions, territorial disputes, and second-class treatment. After a tense period of time, more than 100 former Bonanza franchise owners have voluntarily converted to the Ponderosa scheme. Metromedia has subsequently embarked on an expensive effort--$29 million over two years--to upgrade the chains. Metromedia's interest in its restaurant holdings was also indicated by the abrupt departure of Ponderosa president and chief executive Mike Jenkins in March 1992. As Jenkins himself stated in Nation's Restaurant News, "restaurants have become a major part of the company, and John [Kluge] and his staff probably want to get more personally involved." Indeed, Metromedia's restaurant holdings currently account for approximately 60 percent of its annual earnings.

Metromedia remained a major force in the telecommunications industry throughout the 1980s and into the 1990s, despite its 1986 divestment of cellular and paging interests. Kluge created the Metromedia Communications Corp., which currently ranks as one of the leading second-tier, national long-distance carriers in the United States with $400 million in annual revenues. Hoping to increase its market share, Metromedia announced in February 1993 that a letter of intent providing for the merger of Metromedia Communications Corporation, Resurgens Communications Group, based in Atlanta, and LDDS Communications, Inc., based in Jackson, Mississippi, has been signed. According to the Wall Street Journal, the merger would create "the fourth largest long-distance company, with annual revenues of 1.5 billion."

Metromedia has also become heavily involved in several high-technology ventures. Axon Systems Inc. is a profitable medical technology company that produces advanced brain-wave monitors for medical use. Stanadyne is a producer of state-of-the-art diesel fuel injectors. Finally, Metromedia Technologies, which utilizes computer printer technology to create billboards and theatrical stage sets, boasted revenues of $25 million in 1992.

Kluge is also examining the business possibilities that have presented themselves with the changed political landscape of Russia and Eastern Europe. As part of the International Telcell Group consortium, Metromedia is poised to establish itself as a major provider of wireless cable, cellular and paging services throughout Russia and Eastern Europe. Metromedia hopes to recoup its initial investment in Telcell's first full year of operation.

Metromedia remains a healthy company, with a variety of profitable interests in many different industries. John W. Kluge, commonly viewed as the richest man in the United States--he has donated $110 million to his alma mater, Columbia University--continues to guide the company on a daily basis.

Principal Subsidiaries: Metromedia Steakhouses Company, L.P.; S&A Restaurant Corp.; Metromedia Technologies Inc.; Metromedia Communications Corporation.

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