Call Me Ted

by Ted Turner

  There was one other reason that I saw more value in this deal than did the other potential acquirers. Years before, I had met with a couple of entrepreneurs who were seeking investors. These two had developed a technology called “colorization” that could add color to old black and white films and television shows. I thought it was a great idea. By this time, everyone had color TVs and programming in color was simply better. I passed on investing at that time, explaining that while we ran a lot of black and white programming, we didn’t own any of it. Instead, I suggested they speak to people at MGM and the other studios with old libraries. But I followed their progress in the trades in subsequent months and figured that if we ever controlled a library like MGM’s, we could create value by colorizing the old black and white movies.

  This was a great opportunity and I didn’t haggle about the price. Instead, I focused on the terms and tried to get the deal done quickly. I needed a banker, and the only firm that could raise this much money for us this quickly was Drexel Burnham. As I noted, I had gotten to know Michael Milken well and had been a keynote speaker at one of the gatherings that he regularly put together in Los Angeles.

  Drexel was already representing the other side, but we hired them anyway. There was potential for conflict but I trusted Michael and, besides, Turner Broadcasting and MGM/UA executives would deal directly with each other on the broader deal terms while Milken and his team would figure out the mechanics of the financing. It’s hard to imagine this kind of scenario taking place today but in the mid-1980s this was in keeping with the times. Unconventional deals were fairly common. I guess it’s pretty clear I never had any issue with doing the unconventional.

  So, after months of exhausting work on trying to take over CBS, I ordered our team to do an about-face and now focus its energies on MGM. Bill Bevins, my top financial person, and George Vandeman, our legal counsel, whom we had hired to help us with CBS, led the team that went to Los Angeles and worked around the clock to hammer out the details. Everyone put in a tremendous effort and on August 6—just under the wire—we signed a purchase agreement. The deal was complicated. Turner Broadcasting would acquire MGM/UA for $1.4 billion, then immediately sell United Artists back to Kerkorian, for $480 million. This would have brought our overall acquisition costs below $1 billion but we also assumed $700 million worth of MGM debt, pushing our total tab to roughly $1.6 billion. We planned to work out the remaining details and get shareholder and board approvals to close the deal by the spring of 1986.

  I was elated. We had reached an agreement to buy one of the premier studios and the world’s greatest film library, but the dose of reality was that we still weren’t sure how we were going to pay for it. We had been prepared to take on significantly more debt to acquire CBS, but that company had tremendous cash flow that we felt we could immediately improve. MGM was different. We didn’t have overlapping operations between our companies, and given the extremely unpredictable nature of the movie business, their profits were usually low during good years and nonexistent in bad ones. Adding our junk bond debt to the obligations already on MGM and Turner Broadcasting’s books, our total borrowings were going to run to about $2 billion.

  You could say we had a tiger —or maybe Leo the Lion—by the tail, and the weeks and months following our purchase would be among the most stressful, tumultuous, and exciting of my entire career. I remember flying out to Los Angeles for meetings at the studio shortly after the deal was announced. The MGM people had offered to send a car to meet me at LAX but when I saw how much they paid their drivers, I thought that was crazy so I rented a car instead. If you’ve ever driven a car around Los Angeles, you know how easy it is to get lost and that’s what happened to me when I tried to drive to the MGM offices in Culver City. I hate being late (my father always said, “You can’t always be right, son, but you can always be on time”), and the more turned around I got the more frustrated I became. Finally, I got close enough to be able to see the MGM sign on the building in the distance. When I turned down the next street I was only a couple of blocks away, but I was going the wrong way down a one-way street and a policeman pulled me over. I apologized and said, “I’m sorry, officer, but I’m running late for a meeting at MGM.” When he asked me what business I had at the studio, I answered, “Well, I bought it last week!” He let me go with just a warning.

  A TED STORY

  “I Bet You All Think That I’m Crazy”

  —Roger Mayer

  (IN 1985, ROGER MAYER WAS EXECUTIVE VICE PRESIDENT OF ADMINISTRATION FOR MGM.)

  We had been hearing rumors about Ted Turner circling around our company and first thing one morning about ten of the top executives got a call from Frank Rothman, our chairman of the board. We were asked to come to the boardroom for a meeting at noon. We suspected that it might have something to do with Turner Broadcasting but we weren’t given any details.

  When we gathered around the board table, not one but two chairs were open at its head. Just as we started making nervous jokes about why that might be the door opened and in walked Frank Rothman and Ted Turner! They sat down and Rothman said very graciously, “We want you to know that Turner Broadcasting is acquiring our company and Ted really wanted to meet all of you.”

  After a few more opening comments Rothman turned the meeting over to Ted, and his opening line was, “I bet you all think that I’m crazy.” To our credit, we all nodded yes. We knew better than anyone that MGM was a problem company and from what we had heard that Ted was contemplating paying, it seemed to all of us like a lot of money.

  He continued, “You probably want to know why I bought this company and I’ll tell you why. You own my two favorite movies: The Wizard of Oz and Gone With the Wind.” We waited for the other shoe to drop and he then pointed to his mustache and said, “Don’t you think I look a little like Rhett Butler?” Of course he does, so once again we all nodded yes! It was quite an introduction.

  Shortly thereafter, in one of our first individual meetings together after the deal was made public, I told him that I wanted to walk him around the lot and casually introduce him to people. “They don’t know who you are or what to expect, and it would be a great management tool for you if you would just walk around and take a tour.” He told me that sounded like a great idea and asked how much time we would need. I told him it would probably take two hours; the main lot was about forty-two acres at that time and we would do a lot of walking.

  We went into every department and talked to everyone we saw. People were startled by these unannounced visits and would say, “Oh, hello Mr. Turner!” and he would always respond, “Call me Ted!”

  He must have said “Call me Ted” two hundred times that day. It was quite a tour. Ted seemed to be most enthusiastic and impressed by what he saw and people were very excited to meet their charismatic new owner.

  After signing our deal and while we were waiting to close, MGM released a string of movies that flopped, one after another. The industry in general was having a tough summer and the slate that MGM produced was performing particularly poorly. We knew what was in their pipeline from our due diligence but it was difficult to know that this list represented one turkey after another (including Year of the Dragon, starring Mickey Rourke, and Code Name: Emerald, a World War II drama with Max Von Sydow). MGM released about one movie every month and on average, each title was losing about $15 million. (It got so bad by the following summer that when Paramount was touting a much anticipated summer release, I joked, “They have Top Gun, and we have Bottom Gun!”) People who had already been critical of the high price we paid for the studio were now speculating that Kerkorian knew he had bad movies in the can and was wise to sell when he did. That may be, but in fairness to Kirk he showed us the list and let us make our own judgment. He never warranted that they would perform at a certain level, just that they would be released on certain dates and supported with specific marketing budgets. I wanted MGM’s current production, but my interest in the studio was largely centered on the lib
rary. It was hard for me to believe that they would run up about $100 million in losses from these movies over the next twelve months but they did—making a difficult situation that much harder. As early as October of 1985 we felt we would have to make serious changes to our deal if we were ever going to close. Some suggested that we find a loophole and pull out of it, but I felt we could find a way to make the deal work.

  The word was all over Hollywood and Wall Street that I had overpaid and it wasn’t long before we were in discussions with other companies about transactions that might help us pay down our debt and stay afloat. Viacom, which owned Showtime and the Movie Channel, expressed interest in buying half of MGM but those discussions never went very far. In addition, around the same time, NBC began talking to cable operators about starting their own news channel, possibly trying to take advantage of our difficult financial situation. Fighting off Satellite News Channel had cost us $100 million and we were in no position to take NBC on at that time.

  I decided to negotiate with NBC directly, and we began discussions about their buying 50 percent of CNN for close to $300 million. That activity sparked interest from Rupert Murdoch at News Corporation and the management of Time Inc., but they both wanted to buy all of CNN, not a minority position. The NBC discussions grew fairly intense but they insisted on full editorial control and I wasn’t willing to part with it. Our talks broke off, but the cable operators stood by me and didn’t embrace NBC’s plans for a CNN challenger. It would be several years before they entered the cable news business.

  We also discussed a straight corporate merger with Allen Neuharth of Gannett, a TV station and newspaper company with good cash flow. Al and I liked each other a lot. He was a big fan of our news operation and said that CNN helped give him the idea for USA Today—which he saw as a print equivalent—in 1982. Our talks were serious but I had too many concerns about the future of the print business to move forward with him.

  With Milken’s help, we reduced the cash component of our deal by issuing new shares of preferred stock in Turner Broadcasting System, Inc. to Kerkorian and the other MGM/UA shareholders, and by the end of March 1986 we officially closed our deal. That was the good news. The bad news was that the terms stipulated that we pay off our $600 million in junk bond debt by September, just nine months away. MGM was operating at a loss (having just released more box office failures, including 91⁄2 Weeks) and Turner Broadcasting was barely squeaking by even before we layered on these additional commitments. In fact, I don’t think we expected our revenues to exceed $600 million over those upcoming three quarters. Making matters worse, Kerkorian’s new preferred shares carried dividend obligations and our debt covenants prevented us from paying these in cash until our bond obligations were taken care of. In the absence of cash, we’d have to use Turner common stock.

  The situation was dire and the only way to raise $600 million in cash was to sell assets. As much as I loved the idea of being in the movie business, I would have to live without a studio. The one thing I absolutely insisted that we keep was the library. Following this directive, the Drexel team went to work and by early June we sold the production company, the home video business, and the rights to the MGM logo back to Kirk Kerkorian for $300 million and the studio lot and film laboratory to Lorimar for $190 million. Meanwhile, we managed to keep the RKO and pre-1948 Warner Brothers libraries—and the rights to one of my favorite TV series, Gilligan’s Island.

  We did the best that we could do but it was painful giving up MGM. (I never even had a chance to use a casting couch!) As I mentioned before, when I entered the TV business, I’d never watched much TV and I wasn’t a fan of network news before launching CNN. But I had enjoyed movies since I was a kid, and I was sorry not to retain the studio. But we had still managed to acquire the world’s greatest movie library and now it was time to make the acquisition work. As Scarlett O’Hara said in a movie I now owned, “After all, tomorrow is another day!”

  When the dust settled on our deal, Kirk Kerkorian was praised for profiting handsomely by simply selling assets to me at a high price and buying them back for less. Some have speculated that he took me to the cleaners, but I thought he was honorable throughout the process and we’ve remained friends. But friendly or not, I owed him a lot of money and while our core businesses continued to perform well, we had lost money on the Goodwill Games that summer and it was becoming clear that it would be difficult to pay Kerkorian without refinancing. Otherwise, we’d have to compensate him with newly issued stock, greatly diluting my Turner Broadcasting holdings. If we weren’t careful, control of the company could shift from Turner to Kerkorian.

  Once again, my back was up against the wall. I needed capital but where could I turn? Who would have an interest in helping me stay both afloat and independent? It didn’t take me long to conclude that the cable operators would be my best bet.

  A TED STORY

  “You’ve Got to Do Something!”

  —John Malone

  I was asleep one morning at my home in Denver when the phone rang and it was Ted calling. He and my wife, Leslie, have an interesting relationship because she likes him but she also gives him a hard time about all the dating he does. At any rate, it was about 5:30 A.M.—he’d forgotten the time zone difference from Atlanta—and Leslie picked it up and she kind of gave me the elbow and said, “It’s that asshole friend of yours, Turner!”

  I took the phone and he says, “You’ve got to do something! You’ve got to do something!”

  “What have I got to do, Ted?”

  “You’ve got to do something or else CNN will become KNN!”

  “What the hell’s KNN?” I asked.

  “The KERKORIAN NEWS NETWORK!”

  He asked for my help in figuring everything out and that set us out to raise the money to restructure the debt and get Kerkorian off his back. It was one of those deals where Milken was financing both sides and had gotten Ted into one of those escalating interest deals and it would force him to make the payments in stock if he couldn’t afford to pay in cash.

  By the end of 1986 it was clear that if I didn’t do something soon I’d begin having to transfer Turner stock to Kerkorian within a couple of months. John Malone understood my situation and he and I set to work immediately, knowing that if we didn’t successfully change the company’s ownership structure, within five quarters I would lose control of Turner Broadcasting.

  21

  The Cable Operators

  Calling on John Malone turned out to be the best thing I could have done. Not only did he have a strong grasp of financial issues and an incredible knack for deal making but he also had a burning desire to see us all in the cable industry succeed. TCI didn’t yet have an investment in Turner but John already considered us to be on the same team. Our collective fight was against the broadcast networks, and while our immediate issue was losing control of a Hollywood studio, John could envision our assets eventually flipping to a Big Three broadcaster; and if ABC, NBC, or CBS added strong cable channels to their portfolio, their leverage over the industry would be enhanced significantly.

  As hard as it might have been for me to have outsiders own a significant stake in the company, I did believe that TCI and the cable companies would be good partners. I listened to my father’s advice about getting to know your customers and in the ten years since we had launched the SuperStation, nearly all of them had become friends. For example, that past summer I had flown the group over to Moscow for the Goodwill Games and we had a fabulous time together. The industry was full of solid businessmen and while our negotiations were always challenging, we knew we needed each other. My sense was that if they also had a direct financial interest in our success, we could work collaboratively on new networks and we’d have a much better chance of launching these channels with distribution and subscriber fees. If there was ever a group that I’d welcome into our company as investors and directors, this was it.

  A TED STORY

  “We Didn’t Want to See Him Swall
owed”

  —John Malone

  When I first looked at Ted’s deal for the MGM library, it seemed to me that it was a great asset but that Ted had gotten himself in trouble—not necessarily that he paid too much but he took his leverage too high and the structure of the leverage was a problem. So we had to raise equity for him and I became the junior investment banker to get this done.

  It was critically important to keep Ted independent. We didn’t want to see him swallowed by anybody, especially a broadcaster. So what we were trying to do was preserve a major independent programmer for our own enlightened self-interest and for the good of the industry—and of course that also went parallel to Ted’s view of the world at the time. We set out to raise about $550 million for 35 percent of TBS, Inc. I became the guy raising the money and we came up with half of it ourselves and then we went out to syndicate it. Early on, we thought we had Viacom, which was run at the time by Terry Elkes, and we had the Cox guys and we had the Times Mirror guys, and that was our team.

  We deliberately wanted to keep it away from Time Inc. As much as we liked their CEO, Nick Nicholas, we knew they had great aspirations to control CNN and we wanted people who would be supportive and passive, not ones who would try and take it over from an editorial point of view. That was Ted, too—he didn’t really want to run the risk of losing editorial control of his baby. And so that’s how we set out to raise the money. Well, at the last minute Viacom gets taken over by Sumner Redstone. Sumner’s not interested in playing team ball so he pulls out. So in order to replace Viacom we ultimately have to turn to Time Inc. Then, both Times Mirror and Cox say that if Time Inc. is in, we’re out. So then we ended up having to put it together with just us and our affiliated companies and Time Inc. and with a series of other, smaller cable operators.