The honeymoon appears over for Warner Communications Inc. and Chris-Craft Industries Inc., scarcely one year after the two companies swapped large blocks of stock to help Warner fight off an unwelcome takeover threat from Australian publisher Rupert Murdoch.
Sources close to both companies say the once-cordial relations between Warner Chairman Steven J. Ross and Chris-Craft Chairman Herbert J. Siegel have reached a point where the two men speak only at Warner board meetings, and each man is determined to extricate himself in a face-saving manner.
Ross is bent on regaining control of the company he co-founded 24 years ago, according to several men who know him well. Even though Warner is debt-ridden and Ross owns less than 1% of the company's stock, top Warner officials are trying to devise a plan to buy out Chris-Craft's 28.7% stake in Warner's voting shares, sources say, or take the company private.
Siegel, however, may balk at selling Chris-Craft's stock to Warner. The Chris-Craft chairman has told at least one acquaintance that he fears such an act would be regarded as "greenmail," or the acceptance of a premium for his stock not offered to other shareholders. On more than one occasion, Siegel has voiced objections to that practice.
Instead, sources indicate, Siegel may be preparing to seek greater representation on the Warner board, or the sale of Warner to a third party, unless Warner devises a buy-out that benefits all shareholders equally.
It is an embarrassing impasse for the two well-known executives who travel in some of the same social circles in New York and heralded their business arrangement in interviews 14 months ago. In January, 1984, after Chris-Craft agreed to swap 42.5% of its broadcasting subsidiary for 19% of Warner, the 56-year-old Siegel told The Times that he considered the investment long term and hoped it would continue "after I'm gone out of this world."
Ross, for his part, declared at the time that "Herb is a passive investor. His philosophy is the same as ours."
Although Ross has not responded to a Times reporter's letters or calls for the last seven months, he said through a spokesman Thursday that his "relationship with Herb Siegel is great."
Siegel--normally available for comment on Chris-Craft affairs--declines to talk about Warner. One source close to him, however, says the situation may have improved slightly in recent weeks as Warner works toward a solution.
One source says the business differences have not resulted in personal rancor between Ross and Siegel, but others report considerable tension, which one former Warner executive describes as "open warfare time."
Siegel's initial enthusiasm apparently has been chilled by board-room bickering and Warner's underestimation of the losses it would encounter throughout 1984. Although Siegel repeatedly told colleagues and the news media that he had no desire to run Warner, he has also said he would take steps needed to protect his investment. Earlier this month, he told one luncheon companion that Warner errs if it mistakes his "kindness for weakness."
On Wednesday, the price of Warner stock hit a new 52-week high, closing at $25.875 on a volume of 554,800 shares. Yet another 52-week high was established Thursday when the stock closed at $26.125, on a volume of 244,200 shares. Some sources said traders were reacting to reports of the Siegel-Ross rift and to rumors that Warner planned a significant announcement in the next few days or weeks. An average of 211,200 shares of Warner traded daily in the 50-day period ended March 15.
Siegel's disenchantment may have begun after he and two colleagues joined the Warner board last May, gaining a closer look at Warner's operating style. Siegel apparently objected to Warner's lavish overhead and the continued nurturing of money-losing ventures in restaurants and sports franchises at a time when losses were mounting at the Atari subsidiary.
Although Ross told shareholders last May that he expected profitability to return to the company in the last six months of the year, Warner ended 1984 with losses of $586.1 million, exceeding the losses of $417.8 million posted a year earlier. Shareholder equity plummeted to about $340 million at year's end, down from $960 million at the end of 1983.
Siegel undoubtedly has also been dismayed by Wall Street's reaction to Warner stock. Despite the stellar performance of Warner's core businesses (motion picture and television production, recorded music and publishing), Warner shares have ranged from $17 to $25.625 until Wednesday established the new 52-week high. The price seldom topped the average $25.41 per share that Chris-Craft invested in its Warner holdings and was far below the $50-to-$60 range achieved in Atari's heyday in the early 1980s.
Since Chris-Craft has no pressing need for cash, and because Siegel is believed to be proud of his reputation as a shrewd investor, sources say he is bound to hold out for a profit on the Warner investment.
"Herb's not going to admit he made a mistake," one former associate says of Siegel, adding that if Ross wants to get rid of Chris-Craft, he must take into account Siegel's "ego" and allow him to "walk out of this a winner."
One investment banker says he has heard that Siegel wants as much as $35 per share. At that price, Chris-Craft's block would be valued at $611.8 million, or $167.1 million more than Chris-Craft invested.
Right of First Refusal
Chris-Craft and Warner must offer each other a right of first refusal if either decides to sell its block of stock in the other company, under the terms of the two companies' agreement. Since Siegel is believed to be anxious to regain total control of the 42.5% stake that Warner owns in Chris-Craft's broadcasting properties, the cash price for Chris-Craft's block could be reduced accordingly. Although it is difficult to estimate the value of the six TV stations controlled by the Chris-Craft subsidiary, Ross told The Times at the time of the deal that Warner's 42.5% stake was worth $195 million, although Warner paid just $159 million.
Even if Siegel agrees to be bought out, Warner might have problems raising cash on short notice. The company has already sold most of its non-entertainment operations to bring its debt under control.
Warner does own half of a large cable-TV operation and 26% of Hasbro Bradley Inc., a highly successful toy company, but neither holding can be liquidated without the respective partner's consent.
Two days ago, Hasbro notified the Securities and Exchange Commission that it plans to make a secondary offering of 1.6 million shares of its common stock, which will include 1.2 million shares owned by Warner. At current prices, Warner's Hasbro stock would fetch about $34.9 million, leaving Warner about 4.8 million shares, or 20% of Hasbro's currently outstanding shares of common.
Analysts have estimated that Warner's 50% stake in cable-TV systems is worth about $300 million.
Warner is not likely to sell one of its crown jewels: the Warner Bros. movie and TV studio, its three recorded music companies or its publishing subsidiary. Siegel has told at least one acquaintance that he would not try to gain control of any one of those assets because he believes the entertainment units should be kept together.
Furthermore, as Warner disclosed last December, the company had to pledge the stock of the film, record and publishing units as security in order to reach a new agreement with its bankers. The stock will be released from lien only when Warner's debt falls below $700 million for 30 days and the credit line is reduced to $250 million. Warner currently can borrow up to $550 million.
As of Sept. 30, 1984 (the latest information available), Warner reported a total debt of $852 million.
Warner officials told one institutional investor earlier this year that they were considering "junk" financing, or the use of unsecured, high-interest securities to reduce the company's bank obligations and enable the company to pursue new acquisitions or ventures. No "junk" offering materialized, however, apparently because of Siegel's opposition, the investor says.
Moreover, Siegel appeared shocked to learn from one acquaintance recently that Warner officials contemplated new forays. Even though Warner has considerable tax-loss credits that could be applied to new ventures, Siegel told the acquaintance that he is opposed to any expansion until Warner stabilizes its existing operations and restores dividend payments on its common shares.
In similar fashion, the Chris-Craft chairman recently blocked Ross' effort to set up a new bonus plan for top Warner Communications executives, sources say, because Siegel objects to paying bonuses before the company returns to profitability. However, he has not objected to paying bonuses to executives at successful Warner subsidiaries, sources say.
By most accounts, Siegel has not meddled in the core entertainment businesses or disagreed with Warner's divestiture plan to sell such subsidiaries as Franklin Mint and Panavision.
Squabbles About Overhead
For that reason, some onlookers express amazement that Ross and Siegel have allowed their alliance to crumble over squabbles about corporate overhead spending and executive perquisites, such as Warner's small fleet of aircraft and mid-Manhattan apartments. One man who observed their peevish exchanges said: "They're two grown men acting like 4-year-olds."
In 1984, Warner reduced its corporate overhead by almost 40% but reportedly not without some resistance from Ross.
Former Warner employees explain that the 57-year-old Warner chairman prides himself on being a sensitive, generous employer, and they say that Ross personally relishes the trappings of wealth and power.
"He's protecting a life style," one former Warner official says.
Some Warner sources privately praise Siegel's efforts to pare the overhead expenses, but they say Siegel's penny-pinching could have a harmful effect on Warner's long-term growth because they predict he will veto expenditures on research and development or investments in new, risky businesses.
Siegel is "very shrewd," one former Warner executive says, but he is "not a guy of particular imagination." By contrast, the same man characterizes Ross as "a dreamer, a builder, an entrepreneur (who is) great when he's in total control."
The events of the past two years, however, defied Ross's control. Atari generated losses of nearly $1 billion, and Murdoch's assault on the company ended only when Warner repurchased his shares for $180 million and accepted Chris-Craft as a friendly investor.
"He's shell-shocked right now," one former Warner executive says of Ross.
One-time associates note that Ross has taken no overt steps to reorganize the top ranks of Warner management, despite the exodus of nine out of 26 corporate officers in the past year--including the two co-chief operating officers, David H. Horowitz and Emanuel Gerard.
Some former Warner employees maintain that Ross has never been willing to establish a clear line of succession and is much more anxious to concentrate on plans to rid Warner of the Chris-Craft presence.
Ross "wants his company back. He wants to be the absolute czar of all he surveys," one former executive says, adding that devising a satisfactory plan "may take a long time, because (the issues are) very complex."
And at least one investment banker suggests a plan of separation may not materialize quickly. Neither Ross nor Siegel may be able to arrange financing to take total control, and an outside buyer may not appear. The two men, the investment banker says, may be forced to reconcile.
WARNER COMMUNICATIONS AT A GLANCE
Since disposing of its money-losing Atari subsidiary last year, Warner's business has been concentrated in movies and television production (Warner Bros.), recorded music and music publishing (Warner Bros., Elektra/Asylum, Atlantic), publishing, and broadcast and cable TV. Chris-Craft Industries Inc. owns 28.7% of its voting stock.
1984 Revenues $2.02 billion Income (loss) from continuing operations 13.1 million (Loss) on discontinued operations (611.7 million) Net (loss) (586.1 million)
1983 Revenues $1.72 billion Income (loss) from continuing operations (10.9 million) (Loss) on discontinued operations (406.8 million) Net (loss) (417.8 million)
Shares outstanding: 60.8 million Thursday's closing price (NYSE): $26.125