Metromedia Company Business Information, Profile, and History

History of Metromedia Company

Founded by venture capitalist John Kluge, Metromedia Company is a private holding company for AboveNet, Inc. (formerly Metromedia Fiber Network), Metromedia International Group, Inc., and Metromedia Restaurant Group. AboveNet is a leading provider of fiber-optic network infrastructures enabling high-speed information exchange in 12 key markets along the East and West Coast corridors of the United States as well as in four key European markets. Metromedia International Group provides telecommunications, cable television, broadband networks, Internet access, and other subscriber-based voice, data, and video services to emerging markets in Eastern Europe, the former Soviet Republic, and China. Metromedia Restaurant Group owns and operates nearly a thousand restaurant franchises under the names Bennigan's, Steak and Ale, Ponderosa Steakhouse, and Bonanza Steakhouse, serving more than 160 million guests a year in the United States and abroad.

The Early Business Ventures of John Warner Kluge: 1940s-50s

Chairman John Warner Kluge was the driving force behind Metromedia's formation and growth. Kluge (which means "smart" in German) earned a reputation for identifying promising businesses in their infancy, a knack he has modestly attributed to luck. The independent television stations he accumulated in the 1960s and 1970s formed the nucleus of the country's fourth major broadcasting network--Rupert Murdoch's Fox holdings in the early 1980s quickly grew into a multibillion-dollar stake. But in the early 1990s, media attention focused on his apparent loss of "the Midas touch," as his investments in budget steakhouses and film wallowed.

Kluge (pronounced "Kloo-gy") was born in Germany in 1914 and immigrated to the United States with his family in 1922. He fostered his moneymaking skills while on scholarship at Columbia University, both in the classroom and at the poker table. By the time he graduated in 1937 with an economics degree, Kluge's combination of skill and luck helped him accumulate about $7,000 in winnings. (He has since gratefully bestowed more than $100 million on his alma mater.) Upon graduation, Kluge went to work at Otten Brothers Co., a small paper company in Detroit. Within four years, he had doubled the firm's sales, earning a 30 percent share of the company as well as its presidency.

After serving in the Army during World War II, Kluge began investing his hoard, purchasing Silver Spring, Maryland's WGAY radio station in 1946 with a partner. Over the next decade, Kluge honed his business skills with a series of wide-ranging ventures. First, he was attracted to businesses with high cash food brokerage. Essentially a manufacturers' representative, he sold goods to supermarkets on a flat 3 percent commission. His brokerage eventually became the largest in the Baltimore-Washington, D.C., metropolitan area, and Kluge maintained a 25 percent interest in the highly profitable business through the early 1980s.

Another hallmark of Kluge's business strategy was his liberal use of debt. Metromedia routinely maintained a higher than average debt-to-equity ratio. Although this tactic was criticized, sometimes strongly, Kluge never got burned. He used leverage in many crafty ways, often as a means to another favorite end, tax avoidance. According to a 1984 Forbes article by Allan Sloan, examples of his anti-tax shuffles included "a complicated sale-leaseback of most of the company's outdoor advertising division and the purchase of depreciating rights to 100 million of New York City buses and subway cars." Kluge even moved Metromedia's headquarters from New York City to Seacaucus, New Jersey, to avoid the former metropolis's high taxes.

Examples of Kluge's strong contrarian bent have cropped up throughout his career. For example, whereas other venture capitalists shunned the hotel industry in the early 1990s, Kluge sunk at least $150 million in an aging Manhattan hotel. The most significant aspect of Kluge's contrarianism was that it was more often successful than not.

A final noteworthy facet of Kluge's strategy was his passion for cost-cutting. Although he spared no expense on his own lavish lifestyle, strict on-the-job cost controls were sometimes criticized as cheap. In her captious 1988 book, Too Old, Too Ugly and Not Deferential to Men, Christine Craft, an anchorwoman at one of Metromedia's midwestern television stations, attributed a general lack of upkeep to corporate stinginess. Notwithstanding such criticism, Kluge's combination of strategies served him well.

The Emergence of the Metromedia Empire: 1960s to Early 1980s

The budding entrepreneur laid the foundation of what would become a billion-dollar media empire in 1959, when he and a group of investors bought Paramount Pictures' 24 percent interest in Metropolitan Broadcasting Corp. for $4 million. The company's interests included independent television stations in New York and Washington, D.C. (two of the country's leading markets), as well as four radio stations.

After assuming leadership of the company, which had been spun off from Allen B. DuMont Laboratories in 1955, Kluge took it public, retaining a 12 percent stake. At the time, Metropolitan was generating about $12.4 million in annual revenues, but its profits were practically nil.

Renamed Metromedia, Inc., in 1961, the company specialized in independent television stations, those not affiliated with one of the three national broadcasting networks. Although some observers judged several of his purchases overpriced (especially since independent television was widely construed as a dead end), the stations were bargains in comparison with their network-affiliated counterparts. Once Metromedia accumulated the FCC-mandated limit of seven television stations, Kluge started "trading up" to stations in ever larger and more influential markets.

But Metromedia's upward climb was not uninterrupted. The company struggled through the 1960s, when many of Kluge's ideas proved too far ahead of their time to suit shareholders and analysts. Hoping to build a multimedia empire, he bought a magazine, bus and subway poster concessions, and attempted to form a fourth television network. (His concept, in fact, came to pass in the form of Rupert Murdoch's News years that started in 1969. When, in 1971, one reporter snidely wrote that he had turned "a helluva company into a shelluva company," Kluge launched a rarely suspended personal press blackout.) A mid-1970s recession took Metromedia to its 1974 nadir, when the company's stock sank to $4.25 a share. Kluge tightened cost controls and shed the magazine and other extraneous holdings.

His notoriously good luck combined with Metromedia's retrenchment to pull the company out of its slump shortly thereafter. In 1976, advertisers loosened their purse strings to the benefit of independent as well as network television stations. Metromedia's revenues grew by one-fourth that year, and its profits doubled. By 1980, the company's $450 million annual revenues were generating $55 million in profits.

Kluge the contrarian eschewed the hoopla surrounding cable television and focused instead on programming in the late 1970s and early 1980s. Although his own production efforts proved less than successful, Kluge was good at picking off top shows going into syndication. He even applied his contradictory logic to programming, employing "counter-programming," instead of going head-to-head with network schedules, Metromedia stations slated something different, such as putting a sitcom against the evening news. During this period, the company acquired the rights to perennially popular syndicated shows including All in the Family and M*A*S*H, as well as such first-run syndicated programs as Thicke of the Night and Too Close for Comfort. Metromedia's success was reflected in its stock price, which skyrocketed from $4.50 in 1974 to more than $500 by 1983.

By the early 1980s, Metromedia had stations in seven of the top ten markets: New York; Washington, D.C.; Los Angeles; Boston; Houston; Minneapolis-St. Paul; and Cincinnati. His stable of stations was outranked only by network holdings. The company also held the legal limit of 14 radio stations, the Foster & Kleiser billboard company (which had 42,000 billboards by 1982), the Harlem Globetrotters exhibition basketball team, and the Ice Capades figure skating show.

Kluge and a group of investors took Metromedia private late in 1984 with a $1.6 billion deal. The leveraged buyout (LBO) team borrowed the vast majority of the money needed to pay off shareholders, pledging future cash flow and projected asset sales to retire the accumulated debt. The terms of the transaction offered public stockholders about $40 per share ($30 in cash and $10 in debt): an 80 percent premium over its normal trade. Although the deal went through, Kluge found himself in a difficult position, as he was expected to begin liquidating Metromedia's holdings in order to meet the terms of his heavy debt load. He was faced with a stagnant market, however, where low prices for his prime media properties compelled him to sit tight. With the help of famed (and later discredited) junk bond wizard Michael Milken, Kluge bought some time with a "more favorable" debt refinancing.

The Metromedia "garage sale" started in 1985, after Capital Cities Communications' acquisition of the American Broadcasting Corporation heated up the media market. The company raised $2 billion with the sale of six television stations to Rupert Murdoch and the seventh to the Hearst Corporation. In 1986, Metromedia added more than $1 billion more to its coffers with the sale of the billboard subsidiary, nine radio stations, the Globetrotters, and the Ice Capades.

Kluge's contrariety helped boost that already massive payoff by billions. Against a prevailing opinion that gauged a ten-year payoff period for car phone investments, he had guided Metromedia's expansion into cellular telephony with a $300 million investment in 1983. Writing for Forbes in 1990, Vicki Contavespi called it "one of Kluge's best bets." He sold most of those properties to Southwestern Bell for $1.65 billion and divested the rest for $3 billion in 1990. Within less than two years, the LBO and subsequent sell-offs transformed Kluge's 25 percent, $250 million interest in the publicly owned Metromedia into a multibillion personal fortune and made him the second richest American.

Wide-Ranging Diversification in the Late 1980s and Early 1990s

Kluge began using the proceeds of his media sell-off to amass a restaurant empire. In 1988, Metromedia bought the Ponderosa Steak House chain from Asher Edelman. Edelman had bought the 20-year-old business barely a year before, but bailed out to relieve himself of the hefty debt incurred during the LBO. Kluge then bought Dallas-based USA Cafes, operators of Bonanza steakhouses, from the founding Wyly brothers for $83 million in 1989. These two chains formed Metromedia Steakhouses Inc.

The steak segment's top two chains were very different. Ponderosa was concentrated in the Midwest and was dominated by company-owned units. Bonanza's stronghold was in the Southwest, and the chain had operated as a "pure franchiser," with only two company-owned locations. After an initial period of criticism, both from Bonanza franchisees and restaurant industry observers, several major Bonanza franchise owners converted to the Ponderosa format. There did not, however, appear to be a concerted effort to compel a wholesale changeover. Metromedia also added S&A Restaurant Corp., franchisers of the Steak and Ale and Bennigan's chains, to his stable of steak shops. These more upscale steak restaurants were operated separately from the budget chains, as S&A Corp.

Although Kluge was said to have invested more than $1 billion in the 1,000 units, they lost more than $190 million from 1989 to 1994. To top it off, by 1993 Ponderosa had slipped from number one to number two, and Bonanza dropped to sixth place in annual sales. Industry analysts blamed the problems on everything from high competition to scanty capital improvements, but no one seemed to know how to turn them around.

Kluge entered a completely different milieu in 1988, when Orion Pictures Corporation was threatened with a hostile takeover from Sumner Redstone's National Amusement Corp. Orion was then headed by Arthur Krim, who called on friend Kluge to act as a "white knight." Kluge's investment of $78 million not only staved off the threat, but also gave him a 70 percent interest in the company by the end of the year. But in spite of producing award-winning films including Platoon, Silence of the Lambs, and Dances with Wolves, Orion ran into trouble in the late 1980s. A string of "box office bombs" combined with Orion's heavy debt load ($500 million debt to $485 million in annual sales) to drive the company into bankruptcy by the end of 1991. Orion emerged from bankruptcy in 1992, but lost $250 million from 1990 to 1994.

In an effort to maintain the studio's viability, Kluge took the unusual step of merging it with Actava Group, maker of Snapper lawn mowers, and Metromedia Inc., the group's investment arm, to form Metromedia International Marketing Inc. in 1994. This company expanded into Eastern European radio with the early 1995 acquisition of stations in Moscow and Bucharest.

Notwithstanding his apparent missteps into steakhouses and moviemaking, Kluge had his fingers in other, perhaps more promising "pies" as well. In 1990, he bought into a venture called International Telcell, an Eastern European cable television business. He also re-entered the outdoor advertising segment with Metromedia Technologies, the world's only computerized billboard-painting company.

Having acquired International Telephone & Telegraph Corporation's long-distance service division in 1989, Kluge used it as the basis of a strike into the long-distance telephone industry. The September 1993 merger of Metromedia Communications Corp. with Atlanta's Resurgens Communications Group Inc. and LDDS Communications Inc. moved the resulting company into the top tier of long-distance providers, behind American Telephone & Telegraph Company, Sprint Communications Company L.P., and MCI Communications Corporation. With Kluge as chairman, the publicly held company (of which Metromedia Companies retained a significant stake) changed its name to WorldCom Inc. in mid-1995.

Some analysts speculated that Kluge would need to rid himself of the troubled restaurant and movie businesses to concentrate on the long-distance interests. But Joseph Weber of Business Week noted, "Metromedia's chief has often been quoted as saying he would be bored with just one business to worry about." There was no question that Kluge had the patience to wait out lean times; he juggled independent television stations that others derided as "dogs" for more than two decades before cashing in. Whether the octogenarian still had the stamina to see these projects to profitability was another question entirely.

Although Kluge retained control of Metromedia into the mid-1990s (and the company had no mandatory retirement rule), his general partner and Executive Vice-President Stuart Subotnick emerged as a likely candidate for succession. Subotnick, who was nearly three decades younger than Kluge, had been with Metromedia since 1967. Thrust into the position of chief financial officer upon his superior's untimely death, Subotnick came to the fore in the early 1980s, when Kluge made him a member of his "office of the president" troika. In the late 1980s he had been one of the participants in Kluge's failed LBO venture. Some sources said that he had been a chief (albeit behind-the-scenes) negotiator since the early 1980s. His status as a trusted personal tax advisor to John Kluge, as well as his survival of several upper management purges, appeared to clinch his role as successor.

Rapid Expansion for Fiber-Optics in the Late 1990s

Under increasing pressure from investors to exit the entertainment business, in mid-1997 Metromedia sold off its 2,200-title film and television library and other film assets to Metro-Goldwyn-Mayer for $573 million in cash. Throughout the remaining years of the decade, the company honed its focus on the rapid expansion of its fiber-optic division, Metromedia Fiber Network.

On the domestic front, a key area for this expansion was the Northeast corridor, where Metromedia began to develop a single fiber-optic infrastructure connecting Chicago, Philadelphia, Washington, D.C, New York, and Boston. Using state-of-the-art technology, Metromedia pioneered a new concept in network infrastructure called dedicated dark fiber infrastructure, which offered customers many advantages over the customary, leased capacity service. Indeed, many hailed dedicated dark fiber as a revolution in the broadband market: its dense, meshed network "trunks" gave customers the ability to increase their capacity, or bandwidth, according to business demands, without any increase in service cost. That is, with dedicated dark fiber, Metromedia could offer its customers unmetered--and virtually unlimited--bandwidth at a set cost. As such, Metromedia established itself among a new breed of fiber-optic provider, the "carrier's carrier," selling its services primarily to corporate, carrier, and government customers.

To this end, in 1998 the company signed major agreements with Northeast carriers, including a $6.1 million contract with Hyperion Telecommunications and a $33.2 million contract with Internet service provider PSINet. That year Metromedia also formed a joint venture with the United Kingdom's Racal Telecom to create a fiber-optic infrastructure between the United States and Britain, and announced plans to extend its dark fiber network infrastructure to a strategic West Coast corridor including the San Francisco Bay area and Silicon Valley. Industry experts lauded Metromedia's strategy, even when the company reported continued losses for 1997, insisting that it was positioning itself well for an anticipated boom in customer demand. With the company boasting an 875 percent increase in sales--to $11.7 million--for the third quarter of 1998, these predictions appeared to be accurate.

Continuing to bolster its fiber-optics capabilities, in 1999 Metromedia Fiber Network acquired San Jose, California-based AboveNet Communications in a deal estimated to be worth $1.55 billion. AboveNet, the designer and owner of the "AboveNet Global One-Hop Network," became a wholly owned subsidiary of Metromedia. Together, the companies planned to develop an unmatched optical platform for Internet connectivity in the 21st century.

On the international front, in late 1999 Metromedia announced plans to bring its dark fiber networks to 11 new European markets: Paris, Brussels, Hamburg, Dusseldorf, Munich, Berlin, Hanover, Vienna, Zurich, Geneva, and Milan. The addition of these major corporate, financial, and government hubs would bring Metromedia's infrastructure to a total of 16 key European markets--and pave the way for penetration of the entire continent.

An Inauspicious Entry into the 21st Century

Despite its strategic successes, however, trouble was brewing for Metromedia by mid-2000. Investors had become increasingly impatient with the Metromedia International Group's faltering stock price--which had plummeted 400 percent since the spring of 1998--and its less-than-transparent management practices. Under scrutiny by Lens Investment Management, a Maine-based shareholder activist firm, the company was called upon to turn over its books for inspection and sell or spin off various noncore assets, especially Snapper Inc. By November 2001, under continued pressure from investors, Metromedia International Group announced a sweeping reorganization of its senior management, including the resignation of President and CEO Stuart Subotnick, who was replaced by Carl C. Brazell, Jr. The Snapper unit was finally sold in 2003 to Simplicity Manufacturing, in a deal valued at $73 million.

The situation had turned equally sour for Metromedia Fiber Network, which entered the 21st century staggering under the weight of a massive debt and scrambling to secure a $150 million credit facility necessary to avoid a bankruptcy filing. Even after receiving a $611 million funding package led by Citicorp USA in October 2001, however, the company, which had never reached profitability, found itself filing for Chapter 11 bankruptcy protection in May 2002. Matters continued to spiral downward in 2002: in November the company alerted the Justice Department and the SEC to possible misconduct by its executives in their eastern European dealings, and in December John Kluge resigned from the company's board of directors. After 16 months in bankruptcy, Metromedia Fiber Network emerged from Chapter 11 in September 2003, having assumed the name of its subsidiary, AboveNet. It remained to be seen whether, and how, this company, and Metromedia as a whole, would regain its once prominent stature.

Principal Subsidiaries: AboveNet, Inc.; Metromedia International Group, Inc.; Metromedia Restaurant Group.

Principal Competitors: Deutsche Telekom AG; Level 3 Communications, Inc.; Outback Steakhouse, Inc.

Chronology

• Key Dates:
• 1955: Metropolitan Broadcasting Corp. is established.
• 1959: Venture capitalist John Kluge and a group of investors buy Paramount Pictures' 24 percent interest in Metropolitan for $4 million.
• 1961: Having assumed leadership of Metropolitan Broadcasting Corp. and taken it public, Kluge renames the company Metromedia, Inc.
• 1984: Kluge and a group of investors take Metromedia private in a $1.6 billion deal.
• 1988: Kluge buys the Ponderosa Steak House chain, the first of two major acquisitions that would become Metromedia Steakhouses Inc.; Kluge also invests $78 million in Orion Picture Corp., gaining a 70 percent interest in the company by the end of the year.
• 1990: Kluge enters into an Eastern European cable television business venture called International Telcell; he also re-enters the outdoor advertising segment with Metromedia Technologies, the world's only computerized billboard-painting company.
• 1993: Metromedia Communications Corp. merges with Atlanta's Resurgens Communications Group Inc. and LDDS Communications Inc., moving the resulting company--which, in 1995, would become WorldCom Inc.--into the top tier of long-distance providers.
• 1999: Metromedia Fiber Network acquires San Jose, California-based AboveNet Communications.
• 2002: Metromedia Fiber Network files for Chapter 11 bankruptcy protection in May; John Kluge resigns from the Metromedia board of directors.
• 2003: Metromedia Fiber Network emerges from Chapter 11 under the new name, AboveNet, Inc.