WHO SHOT LORIMAR? : After Film and Video Losses, Studio Mulls Merger, Sees Recovery Ahead

Top executives of Lorimar and Telepictures will always remember the eerie climax of their October, 1985, merger talks, when a hurricane began taking shape outside the Manhattan hotel where they were meeting.

Just as the two big television programming firms reached a basic agreement, the wind rose to a howl, rain lashed their 54th-floor window and a black wall of thunderheads began wheeling across New York harbor. “It was like some bad special effect from ‘The Grapes of Wrath,’ ” recalled David E. Salzman, a co-founder of Telepictures.

Today they may hope it wasn’t an omen. Since the two firms combined, the producer of “Dallas” and “Falcon Crest” has suffered a string of setbacks that are extraordinary even for the volatile entertainment industry.

Lorimar has shelved an ambitious diversification program and endured a painful scandal in its home-video division. Even as it has extended its domination of the TV programming business, the Culver City company has lost $141 million since the merger, including what one analyst estimates has been an $85-million loss at its movie division.

For the past month, Lorimar has been in merger talks with Warner Communications, the diversified entertainment company, amid rumors that Lorimar Chairman and Chief Executive Merv Adelson and the four principal executives of Telepictures who so gladly joined forces no longer wish to work together.

Many in Hollywood still wonder about the travails of this most visible company. What went wrong?

Adelson says Lorimar has suffered from a combination of bad luck and miscalculations. “It’s a fact of life that things haven’t gone as we’d have liked them to, because of our own mistakes and things nobody could have foreseen,” he said.

Lorimar executives insist that the company is now turning the corner. They have predicted that Lorimar will report profits in the just-ended quarter, and they cite the potential of the new management at its scarred film division. “Action Jackson” recently became the first picture that Lorimar has ever had on the weekly box-office top 10.

Many Wall Street analysts agree that Lorimar’s darkest days may be past. But some analysts, and others close to the company, say the adversity has so strained relations in the executive suite that some senior managers may leave even if the Warner talks fall through.

“Economic problems put strains on any marriage, and the marriage of Lorimar and Telepictures was no exception,” said Lee S. Isgur, analyst with the Paine Webber investment firm. “The merger just hasn’t taken like people hoped.”

At the center of the Lorimar drama is Adelson, the willful company co-founder who has become well known traveling the Hollywood and New York social scenes with his wife, TV journalist Barbara Walters. The company’s largest shareholder with an 11% stake, Adelson was architect of the company’s diversification plan and eagerly enlisted the four young executives who had built Telepictures into a top supplier of original shows and reruns to non-network stations.

Adelson had been known for years as the more subdued half of an executive duo that also included Lee Rich, the mercurial co-founder who left Lorimar in 1986 to become chairman of MGM/UA Communications. But Adelson nurtured a passion to expand the company and in particular to build a major film studio alongside its successful TV studio.

“He wanted to walk the halls of a giant--an MGM or a Paramount,” said Tony Brown, a former Lorimar vice president who is now head of syndication for New World Television. “He’s sort of an old-time mogul, 50 years after his time.”

Says Mara Balsbaugh, stock analyst with Smith Barney, Harris Upham & Co.: “TV people are on Hollywood’s social ‘B’ list; he wanted to be on the ‘A’ list.”

When Telepictures executives Salzman, Michael N. Garin, Richard T. Robertson and Michael J. Solomon joined the merged company, they found Adelson keeping a close eye on the film operations that so fascinated him. He made key decisions on scripts, casting and directors, as he had throughout Lorimar’s nine-year effort in movies.

Adelson instructed Craig Baumgarten, the former film division president, to sign Sidney Lumet for a long-term contract, despite Baumgarten’s reluctance. He wanted actor Richard Gere for the lead role in “Power,” the unsuccessful 1987 film about the influence of a political consultant. He chose one of his sons, Gary, to produce several Lorimar films.

The Telepictures executives and Adelson clashed on a number of issues, say former employees and knowledgeable outsiders. “You’d hear the Telepictures guys say, ‘Why should we bother to make money in TV when it’s just going down a hole with the movies?’ ” said a former employee.

The five even disagreed over who would have the privilege of taking the corporate jet.

Lorimar had seen its share of management conflict earlier, when Adelson and Rich led the company.

Rich, who gave up a share of his power when he lost Lorimar stock in a divorce, complained at the end of his days at Lorimar that Adelson left him out of some day-to-day decisions. The two men were seen arguing loudly in the company’s hallways, former employees say.

Today Rich will only say there is “no percentage for me in saying anything about Lorimar.”

Adelson, a Los Angeles native who began his career as a real estate developer, was never shy about sharing his views. Former Lorimar Vice President Brown recalls how Adelson once asked his syndication department to show him how they planned to pitch their services to handle syndication of an important TV show.

The man in charge of the presentation, a mild-mannered Canadian, delivered a pitch that was thoughtful, well planned--but, to Adelson’s way of thinking, entirely without passion. “Just like that, the guy was replaced,” Brown said. “Merv just tore his heart out.”

Lorimar’s senior executives deny that they have had any serious disagreements and say discord was not what motivated them to start talks with Warner. “This is not a company that’s run dictatorially, and we all have an opportunity to speak our piece,” said Adelson. “But in the final vote we’re always in agreement.”

Said Salzman: “We’re a very questioning company . . . and I think it’s healthy in a company to have differences of opinion.”

Adelson’s plan to diversify and build up Lorimar’s film studio had already put the company in conflict with many of those on Wall Street who had hailed the company’s generally steady growth.

Adelson wanted to assemble an integrated media company in which TV and movie studios, TV stations, advertising agencies, home-video and publishing operations would support each other. According to the strategy, the movie and television operations would provide programming for company-owned TV stations and home-video units; advertising agencies could help sell barter advertising time on Lorimar syndicated shows, and the TV stations would serve as a test laboratory for new shows that might ultimately be syndicated.

Lorimar purchased the Kenyon & Eckhardt and Bozell & Jacobs ad agencies in 1983 and 1985, and it inherited five small TV stations, several children’s magazines and a majority stake in the US personality magazine when it merged with Telepictures.

Never So Strong

Providing the steady earnings needed to support the expansion were the television operations, which had won Lorimar a reputation for understanding the vagaries of public tastes. Even before the merger, Lorimar was the biggest supplier of shows to the networks, while Telepictures was the biggest supplier of first-run syndicated shows--that is, shows sold directly to stations.

Today the two have strengthened their lead in that area, dominating the field as no company has done since at least the early 1970s, industry officials say. The company currently provides 8 1/2 hours to the networks each week, including “Dallas,” “Alf” and “Perfect Strangers.” It provides 11 1/2 hours of first-run syndication, such as “People’s Court,” and 7 1/2 hours of first-run children’s programming, where it is also No. 1.

“They’ve been incredible,” concedes a competitor.

Lorimar’s movie-making operations have never been nearly so strong. Since 1977 the company has run through five film division managements and released 36 features.

These include such respected products as “Being There” but also such less-distinguished fare as “Urgh,” and “The Fish That Saved Pittsburgh.” Lorimar last year took a writeoff of $45 million related to motion picture operations; in all, the company has lost about $85 million on films since the merger, estimates analyst Lisbeth R. Barron of the Balis Zorn Gerard investment firm in New York.

For the losses of the old film management “we can only blame ourselves,” Adelson said.

But as critics have pointed to the financial difficulties of independent film makers such as Cannon Group and De Laurentiis Entertainment Group, Lorimar executives have insisted that the company has the ingredients to get it right.

They said Lorimar had advantages that other independents did not, such as its marketing arm, its worldwide distribution arm and its 44-acre former MGM studio lot in Culver City. The big losses of the past two years are from the previous film division management, they note.

Adelson’s expansion plans came apart as Lorimar tried to fit the puzzle with an enormous final piece, a chain of big-city television stations. To the dismay of many on Wall Street, in August, 1986, Lorimar made a first bid of $1.85 billion to buy six such stations from Kohlberg, Kravis, Roberts & Co., an investment firm that specializes in leveraged buyouts.

As Wall Street analysts and institutional investors complained that the deal was overpriced, Lorimar’s stock began a long slide from its May, 1986, peak of $33.50 a share.

After trying twice to negotiate a lower price for the stations, Lorimar abruptly pulled out of the deal in November, 1986, saying the acquisition wouldn’t pay because of weakness in demand for TV advertising.

Bad Luck

Lorimar’s Garin still strongly defends the plan, saying the $1.85-billion offer was an initial bid that was to be revised as Lorimar got more information on the stations’ condition. “If we were as profligate as everybody was saying, we would have bought the stations,” he said. “But the price was too high, and we walked away.” (The stations were sold in early 1987 to Gillette Broadcasting for $1.2 billion, the same price as Lorimar’s final bid.)

Wall Street thought the proposed acquisition was far more than Lorimar could chew. “Losing the stations was a real stroke of luck for them,” said analyst Barron, who does, however, favor the possible merger with Warner Communications.

If it was, it was followed by several stokes of ill luck. Many of the non-network stations that were big buyers of Lorimar syndicated programs began weakening in the tough advertising climate of late 1986, forcing Lorimar to take a $37-million writeoff in January, 1987.

In June of last year, Lorimar announced that it was abandoning the diversification plan and would instead concentrate on its core businesses of television, films and home video. Company officials said that, without a big chain of TV stations, the diversification didn’t make sense, and it announced plans to sell its five small television stations, the ad agency and the publishing division.

But some of the comfort this gave Wall Street critics evaporated when Lorimar simultaneously announced that it would take a $31-million writeoff from its Karl-Lorimar Home Video--a unit that had seemed to be prime proof of how the diversification strategy could pay off.

Lorimar had purchased the home-video unit in 1984, keeping as its president the company’s founder, Stuart G. Karl, who was then 30. A former magazine publisher and one-time Newport Beach water bed deliverer, Karl had prodded the company to rapid growth largely on the success of its Jane Fonda exercise tapes.

But in May, 1986, Lorimar discovered that Karl and two top aides allegedly had a financial interest in a firm that was a supplier to the video unit. Citing a conflict of interest, Lorimar fired all three. Within weeks, an audit revealed that Karl-Lorimar had been accepting returns of cassettes--contrary to industry practice and to what Lorimar officials said Karl had told them.

This meant that Karl-Lorimar would not generate the profits that it had counted on to help bear its film division losses. Lorimar, which has sued the three for breach of fiduciary duty, last February took another $21-million reserve to write down the value of inventory and cover uncollected receivables.

Last February, the FBI said it was investigating Karl for allegedly pressuring employees to make illegal campaign contributions to the presidential campaign of former Sen. Gary Hart.

Hopeful Signs

People familiar with the Karl-Lorimar investigation express bewilderment at Karl’s deception, since it seemed clear that he could not escape detection for long. “Karl went berserk,” said one.

The turmoil in the home-video unit and movie losses had sharply increased Lorimar’s debt. Debt rose from 24% of total capital in September, 1986, to 66% at the end of last December, said analyst Barron of Balis Zorn Gerard.

More recently, however, debt has been coming down, in part because of the company’s sale of the assets it no longer wants. The company sold the merged Bozell, Jacobs, Kenyon & Eckhardt ad agency to its managers in February for about $143 million.

Company officials see hopeful signs in the performance of the film division under President Bernie Brillstein, who produced “Ghostbusters.” The first Lorimar film produced and distributed under Brillstein’s management, “Action Jackson,” has yielded a respectable box-office gross of $20 million.

Many Wall Street analysts believe that Lorimar will at least break even in its film operations next year, enabling the company to move well back into the black. Others, however, disagree; Barron contends that the company will only break even in the fiscal year that will end next March 31.

Lorimar’s Garin says news stories reporting its writeoffs have made Lorimar’s financial condition appear darker than it is. When these charges are recorded, “nothing terrible has happened to the company. . . . We’ve just moved a lot of paper around,” he said.

As the merger talks continue, Wall Street hums with speculation that another big entertainment company, such as Disney or MCA, will approach Lorimar if the talks with Warner break off. Few take seriously the possibility of a hostile takeover, although “somebody could buy a 20% stake and make the company’s life miserable,” said Jeffrey Logsdon, analyst with the Crowell, Weedon investment firm in Los Angeles.

Most analysts also do not take seriously investor Marvin Davis’ declaration that he will pay $17 a share for Lorimar stock.

Lorimar officials insist that they are not talking with Warner because they need to strengthen their balance sheet or fear a hostile takeover. The attraction, they say, is having a role--a central role--in a company that is strong in television, films, records, cable and more.

“We’re not interested in becoming a unit of another company,” Garin said. “This would be a merger of equals.”

A MOMENT IN LORIMAR’S HISTORY

February, 1986--Merger of Lorimar and Telepictures

August, 1986--Lorimar bids $1.85 billion for 6 TV stations

November, 1986--Withdraws renegotiated bid for TV stations

January 1987--Takes a $37-million write-down because of bad debts from TV stations

March, 1987--Three home-video executives resign amid conflict of interest charges

June, 1987--Lorimar abandons diversification plan, announces $31-million write-down from home video unit

March, 1988--Announces preliminary merger talks with Warner Communications

LORIMAR’S NETWORK PROGRAMS

SHOW SEASON Dallas 11 Knots Landing 9 Falcon Crest 7 Valerie’s Family 3 Perfect Strangers 3 ALF 2 Molly Dodd* 2 Full House 1 Slap Maxwell 1 Max Headroom** 2 Our House 2 Aaron’s Way* 1 The Clinic (or Hot House)* 1

* Mid-season replacement

** Canceled LORIMAR’S FIRST-RUN SYNDICATED SHOWS

SHOW SEASON People’s Court 7 Love Connection 5 It’s A Living 4* Mama’s Family 2* Superior Court 2 Truth or Consequences** 1 She’s the Sheriff 1 Thundercats 3 Silverhawks 2 The Comic Strip 1 It’s Garry Shandling’s Show 2

* Lorimar Telepictures purchased first two years of episodes from network run

** Canceled