‘Film industry IR is a hard business. There is no one in the industry smart enough to project how a film is going to do at the box office. There are always surprises,’ says Phil Myers from his cosy Century City office at Nasdaq-listed Orion Pictures Corporation. The head of The Myers Company has been in the film IR business so long that he keeps the blinds partly shut in his office even on a sunny LA day. Surrounded by movie posters and old film paraphernalia, the spotlight is on Myers as he muses on the intricacies of a business he has worked in since the days of Star Wars.
‘I was at 20th Century Fox when a small film called Star Wars hit,’ Myers recalls. ‘The stock was hovering around $6 a share then and the film was $10.5 mn in the hole. The board walked out of the screening room shaking their heads at this outlandish science fiction flick, writing off the investment. As we have all seen, Star Wars turned out to be a phenomenon, and the stock shot to $20 overnight. So, if these guys can’t tell…’
The likes of Credit Lyonnais, Matsushita and Sony were no better at picking winners, as it turned out; perhaps the multi-billion investments of Seagrams into MCA and the Dreamworks dream team will fare better. Whether they do or not, Hollywood financings have a culture all their own, and IR communications strategies must follow suit.
Today, Myers handles Orion, the only major film company to emerge from a Chapter 11 bankruptcy. But it has not been an easy road for Orion. As part of the Chapter 11 saga, the company was shackled from making new films. The proceedings stated that the producer of Academy Award winning Dances with Wolves and The Silence of the Lambs, could not put films on its balance sheet. Orion picked up an Oscar this year anyway, in fact, when Jessica Lange was named best actress for one of the last films it shot, Blue Sky.
When Orion emerged from Chapter 11, it did so with a worldwide film and video distribution network, ten films in the can from the end of its glory days, a valuable film library, irate equity investors, and some $429 mn of debt. ‘We had three major assets when we emerged from bankruptcy,’ says Leonard White, president and CEO of Orion Pictures. ‘Our employees, the support of Metromedia and our film library. All stayed intact and their collective value helped bail us out. The light at the end of the tunnel never was a train, it was beautiful sunshine.’
White has been at the helm of Orion for just over three years now. After 17 years in the hard goods business, seven with GTE Sylvania, stints at Magnetic Video, a period as president of CBS Video and later as chairman of Orion Home Entertainment, he was surprised to hear of his appointment as president and CEO of the company in March 1992. After all, it had gone bankrupt in December 1991 and White’s own future was looking uncertain.
‘I received a call from out of the blue congratulating me on my promotion,’ recalls White, from his bright but austere corner office at Orion headquarters. ‘It was sudden, a great shock. I had to go straight to work in this huge crisis. We had to downsize to a manageable level, save as many people as we could, and reduce overheads to reflect the condition we were in.’ Indeed, as it went into Chapter 11, Orion’s overheads were $82 mn and its employees numbered 529. As it came out, those figures had been reduced to $18 mn and 167.
White completed his downsizing strategy in less than a year, with Orion emerging from bankruptcy in November 1992. Now, some two years later, White is smiling broadly, though with a few more wrinkles around his eyes. Orion has paid over $200 mn to its debtholders, its stock price is firm, and the company may soon be back in the film-making business, firmly ensconced in the white knight arms of the Metromedia empire.
For White, it could not have happened a moment too soon. In its valiant effort to emerge from the quagmire, Orion continues to lose money: for the year ended February 28, 1995 Orion had revenues of $191.2 mn and a net loss of $50 mn. But at least these results showed an improvement on 1994, when the company had $175.6 mn in revenues and made a $125 mn net loss.
The tale of Orion’s rescue, and the myriad communications challenges involved, started with the determined vision of John Kluge, chairman and CEO of Metromedia Co, and his partner Stuart Subotnick, Metromedia’s executive vice president. Metromedia is a restaurant and communications conglomerate and one of America’s largest private enterprises. Kluge is the third richest man in the US with an estimated fortune of $6 bn: not surprisingly, when he sets his mind to something, he generally achieves it.
The business that was later to become Metromedia was first created in 1946, when German-born Kluge, fresh from a stint with US Army intelligence during World War II, bought WGAY radio station in Maryland. He continued to dabble in trading small radio stations until 1959, when he bought control of Metropolitan Broadcasting, which owned television stations in New York and Washington. The company was later renamed Metromedia.
Metromedia’s stock rose from $4.50 in 1974 to over $500 in 1983. That year, Kluge spurred the company to pay $300 mn for cellular and paging licenses across the US. In 1984, Kluge took Metromedia private in a $1.6 bn buyout.
The relationship between Metromedia and Orion dates back to the late 1980s, when Metromedia saved Orion from the unwelcome clutches of Viacom, paying $78 mn for majority control. By then, Orion was over-leveraged, releasing a string of dud movies, and heading for the bankruptcy courts. Metromedia wanted Orion to survive and, as part of the bankruptcy reorganisation, stepped up to the plate by guaranteeing about $260 mn in principal amount of Orion senior indebtedness to its two major debtors. These guarantees were instrumental in keeping the company afloat.
‘We would probably have wound up going out of business without Metromedia,’ says White. ‘But Metromedia had a significant investment and its philosophy is to grow companies, not liquidate them. Still, many analysts believed it would have been much easier to liquidate the company and try to get as much as possible for the film library. The toughest thing to do was what we did, which was to save the company. Yet Orion remains intact. The statistics show that only 17 per cent of companies that go into bankruptcy ever come out.’
Orion emerged from Chapter 11 with a hard-won compromise reached among principal creditors. After countless restructuring meetings, staving off liquidation by the skin of its teeth, Orion negotiated an acceptable truce. ‘Not everyone was walking out arm-in-arm, though all admitted the structure was a solid one,’ says White. ‘We succeeded in doing something no other company in this town has done. When you go through something like this, you never do business the same way again. You become less care-free about your expenditures.’
Basically, Orion senior-secured creditors (banks and Sony) share 85 per cent of the reorganised company’s net cash flow. Orion’s bankruptcy plan contemplates that all its creditors will recap their principal amount over an established schedule. Subordinated debt holders exchanged outstanding debt for a 49 per cent equity interest in the company; and Orion recapitalised with three new issues of debt, totalling about $169 mn of principal amount.
Today, Orion’s extensive film library – which is regularly mined by the home video and television divisions – and its top-notch international film distribution connections, are assets that have increased in value. The distribution network is more straight-forward to value, but a major question mark hangs over the value of the library. Many remember Ted Turner’s billion dollar windfall on the massive MGM library. Turner sold off the remainder of MGM, but kept the library to support his efforts. From Myers’ view, the valuation is difficult: ‘Each title must be projected over time and according to different venues,’ he explains. Still, if we have 750 titles in the library, it is a valuable commodity, especially with all the new technologies on the horizon.’
As part of the turnaround, Orion has been able to dabble in non-recourse film production, primarily because of strategic injections of capital from Metromedia. The company was able to release some ten of the movies that were sitting on the shelf, covering the advertising costs from funds allocated in the reorganisation. In fact, the company’s pictures have performed below management expectations on the whole in the theatrical market place, but they have contributed revenues from other venues.
Of this bunch of ten, one film has stood out – Blue Sky. When Jessica Lange accepted her Oscar for Blue Sky, she said, ‘This is such a wonderful honour, especially for a little film that seemed to have had no future.’ Lange was commenting here on the fact that the film sat on a shelf for four years during Orion’s financial restructuring. Against that, the film certainly did not spend time stuck on video shop shelves: it was a smash hit in the video market, even though it did not do so well in movie theatres.
Meanwhile, Orion closed its glitzy New York offices in late 1992, moving its headquarters to LA. Hundreds of employees had to leave, and White had to orchestrate an intensive employee communications plan to stem uncertainty and stop valuable employees from jumping ship during the restructuring. ‘We notified employees on their situation,’ says White. ‘When people know what their future holds, they are less likely to panic. We kept in close contact throughout the process. It helped that we had employees dedicated to Orion.’
Myers notes that throughout the whole process the company also kept the communication pipeline open with both investors and the media. ‘The credibility level was maintained and that enhances shareholder value,’ says White. ‘We have never put out a press release for the sake of putting out a press release. If we had nothing to say, we said nothing.’
Now, however, Myers does have something to say, and he is saying it. And what he hopes to be saying in the future is that Orion is back in the film business. In order to revive its production arm, and build a major media and communications company in the process, Metromedia announced in September last year that it would combine Orion with Atlanta-based Actava Group and two other companies to form Metromedia International Group Inc (MIGI).
The focus of the new operation is the global convergence of programming and telecommunications. In Kluge’s words the concern is a ‘new global media, entertainment and communications company, a world class contender in an exciting arena’.
In a chain reaction, MIGI will mix and match its assets to leverage their value. MIGI effectively brings together Orion Pictures, in which Metromedia holds a 56 per cent stake, MCEG Sterling, Metromedia International Telecommunications (MITI) and Actava, a company headed by aggressive chief executive officer Jack Phillips. Orion will contribute a film library of over 750 titles and its distribution network; MCEG Sterling will bring in the film-making experience and another 450 titles; entertainment and communications systems will be contributed by MITI, which has cable, paging and telephony interests in eastern Europe and the CIS; and Actava will supply capital and management expertise.
Metromedia International Group will be managed by a three person office of the chairman. Those three are Kluge, current chairman of the boards of Orion and MITI, who is chairman; Stuart Subotnick, current vice chairman of the board of Orion and MITI, who is vice chairman; and Jack Phillips, current president and CEO of Actava, as president and CEO.
In line with the relevant stock prices on March 31, 1995, Orion’s shareholders will receive a total of approximately 12.2 mn Actava shares, or 0.61 Actava shares for each Orion share. MCEG shareholders will receive approximately 610,000 Actava shares, or 0.05 Actava shares per MCEG share. And Metromedia International Telecommunications shareholders will get approximately 10.2 mn Actava shares. The exact conversion ratios to be used will be determined on the basis of the average closing price of Actava’s common stock during the 20 consecutive trading days ending the business day immediately before the merger’s closing date. Actava has provided about $55 mn to Metromedia for use by itself and the other companies.
Consummation of the MIGI coup continues to proceed, subject to board and shareholder approvals, and successful refinancing of outstanding Orion debt, along with customary regulatory approvals and conditions. As Orion has not made any films since bankruptcy, a key objective is to restructure the debt in a way that will allow the company to remove itself from bankruptcy restrictions, and get back into film production. Orion has also disclosed that without the merger, or another form of refinancing, it will not be capable of meeting its debt service obligations during its current fiscal year.
Hollywood is a people town, and perhaps even more than in other industries, management must be scrutinised when investment decisions are made. What are their connections? Are they spending indiscriminately (it’s not unheard of in tinsel town)? Where is production money coming from? In Orion’s case, a significant asset is its ability to distribute its own films worldwide, but this is an asset that will only achieve its full potential if Orion is back in production and adding new films.
‘Orion has many do-able film properties with development potential,’ says Myers. ‘The strategy is to get back into production while making sure independent producers know they can get films distributed and marketed by us as usual.’ In the past, Orion has been noted for releasing the pictures of independent producers like Woody Allen, and that has become an important part of its reputation and revenue-generating capacity.
White notes that the planned merger will allow Orion to add to its film library via new productions. ‘The library’s value will be greatly enhanced with us as an ongoing production entity,’ he says. ‘Not only does it say something about the company, but when you sell a package of films into syndication, it is helpful to have a locomotive in the form of fresh production.’
In a town where relationships in investment are everything, Kluge’s are impeccable. ‘Kluge is the type of person you want to invest in because he is so upstanding, and his banks probably feel the same way,’ says Sally Overstreet, senior vice president in the research department at LA-based brokerage firm Jeffries & Company. ‘Most investors that have joined him in the past feel he will do whatever is necessary to get this merger accomplished.’
Overstreet, whose speciality is high yield securities, still prefers Orion’s bonds to its stock. ‘If you believe this deal is going to go through, you can earn a substantial return. I’d rather buy bonds than be involved in the stock side where your downside is considerably greater. Still, Orion shareholders will be much better off with the merger.’
And according to David Londoner, a leading entertainment analyst and managing director of New York-based investment banking firm Wertheim Schroder & Co, ‘The Metromedia people are very smart. Orion was capital short which effectively prevented it from maintaining a credible feature film production programme. With the merger, the capability will exist for re-entering the film production mainstream.’
During this period of great activity, Myers’ task has been to explain the reorganisation of Orion, deal with debt holders, and explain to the general and financial media what the company has been doing. But he has also had to explain to the equity holders the transfer of shares and the future of Orion as part of MIGI. After all, Orion shareholders must buy into the future of the new entity.
‘Bankruptcy communications are confusing to many people,’ admits Myers, who spends considerable time dealing with retail investors uncertain about everything from debt repayment to the very existence of Orion. ‘Some brokers didn’t call their clients to tell them about the reorganisation,’ says Myers. ‘Some held their stock in street names, and brokers did not send them documents on time. Now it’s too late to make conversions. It adds another dimension to the investor relations challenge.’
As for Street’ opinion, Myers is upbeat. ‘Many see Orion emerging as a stronger, better-capitalised entity as a result of the merger,’ he says. For now, investors and their financial advisers are poring over the new valuations for Orion under MIGI. ‘Based on the calls, some people seem to be pretty excited about the merger,’ says Myers. ‘Investors can either have a company that bumps along on its own or one that will be part of a worldwide conglomerate. It will be up to them to decide Orion’s fate.’
