Risks Pay Off for Metromedia Founder Kluge

If John Werner Kluge’s German ancestors subscribed to the Old Country notion that business risks and heavy debts are to be avoided, they might be surprised to see how young John fared in the New World.

For Kluge, who emigrated from Chemnitz, Germany, at age 8, has built his business with a strategy that used plenty of both. This week, that strategy seemed to pay off as Kluge’s Metromedia Inc. sold its seven television stations in a $2-billion deal that was handsome even by the high-priced standards of the day.

Those who have followed Kluge’s career say the deal follows a pattern of dexterous maneuvers by a slight, shy 70-year-old whose appearance suggests anything but the media baron that he is.

“The world expects flamboyant Ted Turners on top of the big communications companies,” said James H. Quello, an FCC commissioner and Kluge acquaintance for 40 years. “This man built the largest independent TV company and set a few patterns for the industry as he did it.”

Some in the business, for example, say it was Kluge’s Metromedia that first established that non-network TV stations could be highly profitable by programming a heavy dose of network reruns and old movies. (Operating profits from Metromedia’s broadcast operations grew an average of 17% a year between 1977 and 1983, the year before Kluge engineered a buy-out of all of its shareholders.)

Some in the business assert, too, that Kluge (pronounced KLOO-gee, with a hard g ) became a model for other broadcasters in his strategies of borrowing heavily, paying top dollar for premium stations and using the tax code to its fullest potential.

For his part, Kluge--who is chairman, president and chief executive of Metromedia--has refused to comment personally and declined to be interviewed for this story. But the transaction again drew comment from others about Kluge’s deal-making abilities.

Left With 9 Radio Stations

It calls for 20th Century Fox Film Corp. co-owners Rupert Murdoch and Marvin Davis to assume the TV stations’ $1.3-billion debt and pay an additional $700 million to Metromedia, which is 93% owned by Kluge. The company, with headquarters in Secaucus, N.J., is also negotiating to sell Metromedia Producers Corp., its TV production and sales company.

That sale would leave Metromedia with nine radio stations (including KMET-FM in Los Angeles) and its nationwide network of licensed mobile telephone operations.

Industry officials noted that the seven stations were sold at a price about 17 times their annual cash flow (that is, operating income plus depreciation and deferred taxes.)

“For independent stations, a price that equals 12 times cash flow is very high,” said Jim Conley, senior vice president of Meredith Corp. in New York, owner of seven television stations. “So, even in this atmosphere of super-heated media deals, that’s some price.”

Some in the industry speculate that Kluge may have sold because he found it increasingly difficult to service his company’s Himalayan debt. But if Kluge was forced to sell, he nonetheless did so at a good time--for many believe that prices for TV stations may soon reach their peak.

“With growing competition from videocassette recorders and cable TV, you have to wonder if (station) prices can keep doubling every three or four years,” said an industry veteran, who asked not to be identified.

Kluge’s acumen drew comment after two other recent deals.

A year ago, he took Metromedia private in a $1.19-billion buy-out of public shareholders that left him with 93% of the company’s voting shares and about $115 million in cash. Then, last December, Metromedia floated $1.9 billion in so-called junk bonds that enabled the company to defer payments of principal until 1988 and generated $290 million in cash in the interim.

Record Price for TV Station

Some eyebrows were raised in 1982, when Kluge paid $220 million for WCVB-TV in Boston in what was then the highest price paid for a television station. The move seemed wiser last weekend, when it was announced that Metromedia has agreed to sell the station to Hearst Corp for $450 million--the new record price for a single station.

“The 1982 price suddenly looked a lot less inflated,” Quello said.

Kluge, who lives high above New York in an apartment at the Waldorf-Astoria, grew up in Detroit. He was graduated from Columbia University in 1933 with a degree in economics and later served in World War II as a captain in Army intelligence.

His first broadcast properties were radio stations, but, in the mid-1950s, he bought his first television station. Appearing publicly far less than many other media company owners, he collects art, breeds cattle and is said to play a ferocious game of poker that hints at his aggressive style of business.

He still speaks with a slight German accent and counts among his friends politicians and entertainers, including Frank Sinatra.

Kluge lent his New York apartment to Ronald and Nancy Reagan for a weekend during Reagan’s 1980 campaign for the presidency. He rarely gives interviews.

He decided on a buy-out of Metromedia’s public shareholders last year after grumbling that Wall Street securities analysts had contributed to a sharp drop in the price of its stock by questioning Metromedia’s TV-advertising prospects and its venture into the mobile telephone business.

Analysts were not alone in questioning some of his moves. In articles two years ago in Barron’s magazine, well-known accounting professor Abraham J. Briloff criticized Metromedia’s accounting practices, including a tax-shelter scheme based on the sale and lease-back of advertising billboards.

Briloff described that deal as “an inspired application of old tax rules.” Metromedia stock dropped $100 per share to $390 in the first two days after publication of the Briloff article.

Observers of the mobile telephone industry say that Kluge has rushed into that business with characteristic fervor. He spent more than $400 million in the last three years to set up operations and purchase licenses that have given Metromedia one of the largest--if not the largest--share of that market.

Among other areas, the company and joint ventures in which it participates are licensed to operate in the Baltimore-Washington area, New York, Boston and Miami, said Lee Greathouse, editor of Cellular Radio News in Arlington, Va. But in the industry “the feeling is widespread that they’re overextended. It takes two years, or often three, to really see the return on your investment,” he said.