Monday, May. 20, 1985

America's Newest Video Baron

By James Kelly.

Television and newspaper historians, take note: the date that Australian Press Baron Rupert Murdoch, whose holdings span three continents, set in motion the negotiations that would alter his empire (not to mention his passport) is March 28, 1985. Murdoch was paying his first visit to the Hollywood studios of 20th Century-Fox, half of which he had just bought from Denver Oil Tycoon Marvin Davis. As it happened, John Kluge, the billionaire chieftain of Metromedia Inc., was also on the lot that day to attend an investment conference.

Murdoch and Kluge, already friends, exchanged pleasantries; before long, Kluge was sounding out Murdoch and Davis about selling them Metromedia's string of television stations. A discussion over dinner led the following day to serious talks, which eventually led to marathon meetings in Kluge's apartment in New York's Waldorf Towers. As the hard-driving Murdoch described the complex bargaining that followed, "You find things you don't expect, you shout, you scream."

The shouts and screams are over. Murdoch and Davis agreed last week to buy the nation's largest independent television archipelago, with stations in New York, Chicago, Los Angeles, Washington, Dallas, Houston and Boston. The price tag is $2 billion, making the acquisition the second largest in broadcasting history. (First place belongs to the $3.5 billion takeover of ABC by Capital Cities Communications in March.) The new owners will immediately sell Metromedia's Boston outlet, WCVB-TV, to the Hearst Corp. for $450 million. Murdoch and Davis will end up with six stations that reach one out of every / five U.S. households, thus providing a potent market for Fox movies and programs. Together, the two men harbor an ambitious dream: to become major players in American television and develop their holdings into what amounts to a "fourth network." Alone, Murdoch may have an even grander plan: to build a global television empire linking Europe, America and Australia.

The deal was put together with such speed that even Murdoch was surprised. "It's hard to believe it began five weeks ago," he says. The transaction further cements a remarkable partnership between two self-made men, each long accustomed to being his own boss and acting accordingly. On one side of the table is Keith Rupert Murdoch, 54, perhaps the most feared and grudgingly admired press entrepreneur in the English-speaking world. On the other is Marvin Davis, 59, son of a New York dress manufacturer who wildcatted an oil fortune in the Rocky Mountains. The two offer a startling physical contrast: Davis is a 6-ft. 4-in. bear weighing 300 lbs. and fond of enveloping friends in an enormous embrace; Murdoch is trim, 5 in. shorter and circumspect, though cordial, in manner. Both share an aversion to the spotlight, a passion for long working hours and, more to the point, a consuming interest in making their millions beget more millions.

Yet Murdoch's TV dreams will cost him a well-known slice of his American fief. Federal Communications Commission rules bar a newspaper publisher from owning a TV station in the same city. Thus Murdoch will have to sell both the New York Post, a screeching tabloid partial to news of crime, sex and the latest lottery winner, and the more sedate Chicago Sun-Times. To raise cash for the Metromedia deal, Murdoch is also seeking a buyer for the Village Voice, the leftish Manhattan weekly that nearly always was at odds with its owner's conservative politics (asking price: a very capitalistic $55 million).

The best-known possession Murdoch may have to give up is his Australian citizenship. FCC regulations also bar foreigners from owning more than 20% of a broadcast license. Murdoch, who has lived in New York since 1974, announced that he will apply to become an American citizen. If his application is approved quickly, Murdoch could recite the Oath of Allegiance in a matter of weeks. Though Murdoch may seek dual citizenship, Australian law forbids it; unless Murdoch finds a legal loophole, he will be an American only.

Though Murdoch had thought about becoming a U.S. citizen since 1983, the prospect of the Metromedia deal made up his mind. The decision, nonetheless, was a difficult one. Born and raised in Melbourne, Murdoch inherited a pair of struggling newspapers in Adelaide from his father in 1952; from that puny seed grew Murdoch's $1.8 billion-a-year empire, which still has headquarters in Australia (see chart). Even Murdoch's mother, who lives near Melbourne, seemed taken aback. "It was quite a bit to swallow at first," says Dame Elisabeth Murdoch, 76, "but that doesn't alter the fact that Rupert is still fond of his country."

The Metromedia sale was engineered by Kluge in great secrecy; even some of his top executives did not know about it until talks were well under way. A German immigrant who came to America at age eight, Kluge bought a controlling interest in a small broadcasting company in 1959 and built it into a $500 million-a-year telecommunications firm. Kluge took Metromedia private last year, but the maneuver left it $1.3 billion in debt. Realizing that he could not handle all that red ink, Kluge decided last January to sell at least some of the TV stations.

By the time Kluge talked to Murdoch and Davis, he had agreed to sell the Boston outlet to Hearst. Murdoch did not mind losing out on that station (among other things, it would have forced him to sell his Boston Herald). The major sticking point was Kluge's reluctance to include New York's WNEW-TV in the deal. "It justified the whole package to us, that New York was there," Murdoch told TIME. When Kluge relented and agreed to give up WNEW-TV, "normal negotiating," as Murdoch calls it, commenced.

Murdoch and Davis agreed to assume Metromedia's debt and pay Kluge an additional $640 million in cash. After collecting $450 million from Hearst for the Boston station, the Fox partners will have to put up only $190 million themselves. (Kluge retains control over the rest of Metromedia, including its 13 radio stations.) Nonetheless, Wall Street analysts agree that Murdoch and Davis paid top dollar. Interest on Metromedia's debt now totals $100 million a year; come 1988, $160 million will be due annually to pay off the principal and additional interest. "We don't know if this is a good deal," says Edward Atorino, a media analyst for Smith Barney. "We'll have to look back in two or three years. But it's not going to be easy." No one knows that better than Murdoch, who realizes that the cash generated by the six stations will not cover all of the liabilities. Thus, he will most likely attempt to renegotiate the debt before 1988.

What is most attractive about his new purchases, Murdoch claims, is their locations. "It's the top markets more than the top stations," he says. "It is the choice group if you are looking for a network." The six stations now offer a decidedly mixed diet of programming, heavy on reruns of such vintage hits as I Love Lucy and M*A*S*H. Both New York's WNEW and Washington's WTTG produce several shows a week, including hour-long prime-time news programs that cover the local scene well. "You are not going to see a wall-to-wall network by next year," says Murdoch. "But we would hope to become a fourth force over the next few years."

The stations will be overseen by Barry Diller, the former Paramount Pictures boss who was lured to 20th Century-Fox last year. Diller intends to use the outlets as the primary customers for Fox-produced programs, thus guaranteeing the studio a market and making it easier to promote its wares to other independent stations around the country. This type of programming, known as "first-run syndication," has become increasingly popular, primarily because it eliminates the network's cut of the profits and thus translates into greater riches for producer and station alike. Among the best-known shows of this kind: Entertainment Tonight, the sprightly show-biz chronicle seen on nearly 150 stations, and Fame, a weekly series that Metromedia helped finance after it was canceled by NBC in 1983.

Analysts point out that the high cost of producing programs will limit what Fox can offer. In addition, network viewership has declined as Americans increasingly select alternatives to standard TV fare, such as cable TV and videocassettes. If the pie is shrinking for the three networks, how much will be left for a fourth? Some industry experts answer that independent stations have gradually attracted a larger share of the audience over the past five years. Diller is confident that Fox will devise the right programming mix to aid that trend. Says he: "People only watch programs, not networks or channels."

The trade-offs Murdoch must make for this deal, however, suggest that he has a more ambitious plan in mind. After all, here is a shrewd financier spending a great deal of money and giving up his citizenship for half a dozen stations that will not pay back their purchase price for years to come. Murdoch operates Sky Channel, a satellite station that supplies English- language programming to more than 1.6 million homes in Britain and Europe. He also owns two TV stations in Australia. Once Fox steps up production for its TV outlets, Murdoch in turn could transmit the new programs to his foreign viewers at relatively little cost. One small problem: Australia, like the U.S., has strict TV-licensing rules. If Murdoch does lose his Australian citizenship, he may be forced to relinquish control of his Sydney and Melbourne stations. That loss would still leave Murdoch with the more lucrative European market.

Such optimistic speculation about the future of Murdoch's airwaves contrasted with the anxiety of his 1,200 employees at the New York Post. Though circulation has almost doubled since Murdoch bought the paper in 1976 (from 500,000 to 900,000), the tabloid still loses about $10 million a year. Potential buyers include the Chicago-based Tribune Co., which publishes the New York Daily News (circ. 1,391,000), and the Times Mirror Co., owner of Long Island's Newsday (circ. 542,000), which is making a strong bid to break into the New York City market. Either company, however, might purchase the Post only to close down a pesky competitor and take over its press plants.

Other potential bidders may be scared away by the thought that if Murdoch could not make the paper profitable, no one can. In his quest to put the Post in the black, Murdoch transformed a liberal if tired tabloid into a manic, grab-'em-by-the-lapels paper that jolted readers with apocalyptic headlines. If newsprint could talk, the Post would be the loudest paper in the country. A rambunctious student upsets a teacher? Read all about it in last Wednesday's edition under MOTORMOUTH MENACE MADE ME QUIT. If the Post had not been so uncharacteristically silent about its possible fate last week, its front-page story might have been headlined AUSSIE NO LONGER OUR BOSSIE? WHAT NEXT????

The mood is more optimistic at the Chicago Sun-Times, which Murdoch bought in 1983 for $90 million. Though its circulation trails the competition (639,000, vs. 776,000 for the Tribune), the Sun-Times turns a marginal profit. Editor Frank Devine, who was installed by Murdoch last January, is confident that a buyer will be found. "Of course, I'd rather Rupert kept the Sun-Times. After all, he's a rather zingy fellow, the kind of live-wire person I like."

Zingy is not necessarily the first adjective many of Murdoch's employees would pick to describe their boss. Industrious, yes. After graduating from Oxford in 1953, Murdoch worked as a subeditor on the London Daily Express in order to learn the newspaper trade. Ambitious, yes. Once he had revitalized his father's papers, he quickly bought a string of other Australian dailies, then eventually hopscotched to London in 1969, when he acquired the Sunday scandal sheet News of the World, and the U.S. in 1973, when he purchased both the San Antonio Express and News.

Today Murdoch oversees a barony of more than 80 publications that stretches from the august Times of London to the brassy London Sun (with 4.1 million readers, the world's largest English-language daily), from yuppie- caressing New York magazine to the Star, a tabloid weekly once specializing in offbeat diets and visits by UFOs that is now trying to climb upscale. The prototypical Murdoch daily is flag-waving conservative, and politicians favored by its owner are featured prominently in the news columns. At a time when newspapers are increasingly concerned with attracting affluent readers, Murdoch presents himself as a populist eager to satisfy the man in the street.

Murdoch, however, does not practice an egalitarian management style. Despite pledges made to Parliament that he would respect the editorial independence of the Times, Murdoch forced out Editor Harold Evans after a year of editorial and budgetary wrangling. He indulges a love for details, whether it is writing a headline for the Post or keeping in constant touch with his worldwide holdings by telephone. As a boss, he can be emotional, impulsive and demanding. "Murdoch runs a Byzantine court," says a former Sun-Times executive. "There is only one decision maker."

For all the flamboyance of his publications and the jet-jumping schedule he must keep to oversee them, Murdoch does not have flashy tastes. He always flies by commercial airliner. His suits, though well tailored, are often wrinkled. He rarely joins New York's evening social whirl, preferring quiet dinners at his Fifth Avenue triplex with his wife Anna and children. (Murdoch has a daughter from his first marriage and two sons and a daughter from his present one.) Weekends are often spent at a farm in upstate New York or at a ski lodge in Aspen, Colo.

By all reports, Murdoch gets along with Davis splendidly, but that may be because they apparently have left the running of Fox to Diller. Now that Murdoch has substantially increased his stake in the TV game, he may be more eager to help run the show. After all, Rupert Murdoch feels strongly enough about this latest venture to consider forsaking his Australian citizenship. Television and newspaper historians, take note: March 28, 1985, may, in retrospect, be the day that 20th Century-Murdoch was born.

CHART: TEXT NOT AVAILABLE

With reporting by Dan Goodgame/Los Angeles and Barry Kalb/New York, with other bureaus