A Major Studio Player : Columbia Profits Razor-Thin, but Allen Makes Big-Time Gains

Upstairs, on the 11th floor of 711 Fifth Ave., is the corporate headquarters of Columbia Pictures Entertainment.

It is a problem child of the movie industry, plagued by films that don’t sell (“Slaves of New York,” “Chances Are,” “The Adventures of Baron Munchausen,” “True Believer”), and managers who don’t stick (David Puttnam, Francis “Fay” Vincent, Guy McElwaine, Frank Price, Alan Hirschfield, David Begelman).

Downstairs, on the 9th floor, are the offices of Big Investor Herbert A. Allen, a one-time Columbia chairman who has held stock in the studio since 1973.

Oddly enough, the 49-year-old Allen and other long-term shareholders have profited hugely from Columbia, no matter how badly some of its movies and managers have done.

When Coca-Cola Co. bought what used to be Columbia Pictures Industries in 1982, Allen swapped his firm’s 600,000 Columbia shares, purchased for around $4 a share, for $42 million in cash and Coke stock.

Five years later, Coke merged its studio with Tri-Star Pictures to form a 49%-owned subsidiary, Columbia Pictures Entertainment. Allen, a director of both Coke and the new Columbia, quickly scored again. He kept his Coke stock, now worth $65 million, and augmented his extensive Columbia holdings with an additional 1.8 million Columbia shares purchased at prices under $10, which helped push that stock toward $20 amid rumors that Coke would sell the studio to a big foreign buyer like Sony Corp.

A year later, the buyout hasn’t come and Columbia’s profits remain razor-thin. But the rumors persist--and Allen is still counting gains on the 9th floor, while Columbia executives, led by president and CEO Victor Kaufman, scratch for success just two stories up.

Entering its 17th year, Allen’s upstairs-downstairs relationship with Columbia remains one of Hollywood’s most closely watched, and least understood, corporate marriages. Allen and Kaufman have declined to discuss it, although Kaufman said:

“Herbert is a very close friend and we’ve been business associates for a long period of time. Herbert’s made very significant contributions to Columbia--both as a member of the board and as an investment banker. In my view, he has one of the broadest bases of knowledge about the entertainment industry, a tremendous amount of experience, and he brings a lot to the company as a result.”

Some friends say Allen, the poker-faced scion of a rich investment banking clan that once controlled Warner Bros., stays with Columbia less from love than from fascination with its lucrative intricacies. “Herbert does it because he has found not a solution to the conundrum, but a rationale that makes it very profitable,” says John Heyman, a British film financier and Allen intimate.

Heyman adds: “He’s not married to the film industry, so becoming uninvolved with Columbia would not be a painful divorce. If an offer was received acceptable to Coke and advantageous to the other shareholders, he would sell in an instant and find lots of other equally fun investments.”

Fay Vincent, a former Columbia chairman who remains close to Allen in Vincent’s new position as deputy commissioner of Major League Baseball, tends to agree. “I don’t think Herbert’s sentimental. . . . He has shown that he’s willing to sell things at the right price,” says Vincent.

That presumed willingness to sell could be a critical factor in Columbia’s future, since Allen wields enormous influence as a member of the Coke board’s finance, executive and compensation committees. Allen & Co. Inc., a securities firm founded by Allen in 1964, has also served as investment banker and adviser to Columbia, Tri-Star and Coca-Cola.

One of Hollywood’s more exotic recent rumors claimed that Allen was trying to lure Michael Ovitz, president of the powerful Creative Artists Agency, into an arrangement under which Ovitz would run all or part of Columbia in return for a major ownership stake in the studio.

A spokesman for Ovitz declined to comment, and one friend of Allen privately maintains that the investor is only casually acquainted with the agent. In any case, Kaufman and his movie chief, Dawn Steel, have clearly mended fences with CAA since Columbia’s disastrous battle with the agency under the short regime of Englishman David Puttnam. Release schedules for both the Tri-Star and Columbia units, led by “Ghostbusters II,” which is scheduled to open June 16, are heavy with CAA’s projects and stars.

(One theory has it that Columbia and Allen are only waiting for profits from “Ghostbusters” to make their move. “Everybody knows companies sell better with big earnings. There are no earnings at Columbia right now,” says one Hollywood attorney with ties to the studio.)

In New York, buyout speculation has continued to center on large corporate players. Columbia stock recently peaked at 21 1/4--despite reported profits of just $21.7 million, in keeping with a previously announced company expectation of low earnings--partly on rumors that L’Oreal, a French cosmetics firm, had been buying Columbia stock.

“The worse the earnings are, the more the Street believes Coke will want out,” says one Wall Street securities analyst, who declines to be identified.

A Coke spokesman didn’t return calls seeking comment on the buyout talk.

Allen played a principal role in brokering Columbia’s sale to Coke, at a time when the studio was still recovering from a takeover battle with investor Kirk Kerkorian and the taint of David Begelman’s financial misdeeds when he headed Columbia’s movie operations. The wisdom of that stroke has provoked debate. “Was it a plus or a minus? It made a lot of people a lot of money. But the company was not thereafter independent, and went through a lot of thrashings,” says Vincent, who was pushed aside as Columbia’s chief in the 1987 combination with Tri-Star.

During the Coke years, Columbia built a massive television presence, largely by acquiring Embassy Television and Merv Griffin Enterprises, which produces “Wheel of Fortune” and “Jeopardy.” Kaufman credits Allen with engineering the purchase of both Embassy and Loews Theatre Management Corp., which gave Columbia a major presence in theatrical exhibition.

But the movie operation, the yardstick by which Hollywood tends to measure success, never stabilized, despite--or because of--Allen’s complex loyalties to various executives.

When Begelman, then Columbia’s film chief, was discovered to have misappropriated about $100,000 in 1977, Allen backed him to the hilt against studio chairman Alan Hirschfield, who eventually lost his own job in the fight. As recently as 1987, Allen told Institutional Investor in a rare interview that his major mistake was not to have dismissed Hirschfield sooner. “I should have fired Alan Hirschfield the first day I found that he was negotiating with (British investor) Jimmy Goldsmith to take over the company. But I didn’t want to; I had known him too long. I was too soft on him. In those days I think I was easier to push around,” Allen said.

Later, Allen developed a close bond with movie chief Frank Price, who scored heavily for Columbia with “Tootsie” and other films. Yet his ultimate loyalty went to Vincent, an old Williams College schoolmate who let Price defect to Universal rather than accede to demands for fuller authority.

(Price, now an independent producer, has persistently been rumored as a potential player in some future Columbia regime, should present movie chief Dawn Steel fail. Allen has done his share to keep the rumors alive. “If I had my way, Frank Price would still be running Columbia,” he told one acquaintance last year.)

According to several accounts, Allen became sufficiently detached from Columbia’s day-to-day dealings under Coca-Cola that he never even met David Puttnam until several days after Vincent’s decision to hire the British producer as movie chief in 1986.

Within a year, however, he became bitterly angered by what he believed were Puttnam’s excessively close dealings with British cronies, to the exclusion of Hollywood’s major stars. And when Puttnam left in the 1987 restructuring, Allen threw his weight behind Tri-Star president and former Columbia general counsel Kaufman--to whom he has been staunchly loyal over the years, despite widespread criticism of Tri-Star’s creative record ever since Kaufman, Vincent, Allen and others helped create the new studio as a joint venture of Columbia, CBS and Time Inc. in 1982. “Victor is in clusive. Puttnam is ex clusive,” Allen once explained.

Allen’s closest friend in Hollywood remains Ray Stark, the 73-year-old producer who helped broker his initial investment in Columbia when the studio was teetering on the brink of bankruptcy, and it owed Stark money.

“Herbert had a certain intuition when we bought the stock,” Stark said during a recent interview. “I had more than one reason for wishing Columbia to succeed, since it owed me quite a bit of money which I would have lost if the company had gone bankrupt. But it was different with Herbert. He just believed in Columbia’s future.”

The quintessential New Yorker, Allen lives at the Carlyle Hotel in Manhattan, and has homes in Southampton and Sun Valley. He counts novelist Tom Wolfe among his friends--”The Bonfire of the Vanities,” about the fall of an investment banking giant, cribbed episodes from Allen’s life--and he maintains a museum-class collection of American Impressionist paintings, although he stopped buying, on principle, when art prices pushed beyond levels he found reasonable in recent years.

Allen’s second marriage, to actress Anne Reinking, broke up last year. Friends say he remains cool as ever toward the film community and its trappings; yet his firm has extended the Hollywood side of its business far beyond Columbia.

(Non-entertainment interests have ranged from MCI in telecommunications and Northwest Energy in natural gas, to the now defunct Washington Airlines, a commuter carrier that Allen has numbered among his worst investments.)

Stanley Shuman, an Allen & Co. partner, has been financial adviser to Rupert Murdoch for more than a decade, and sits on the board of News Corp., through which Murdoch controls Fox Inc. In the last several years, moreover, Sydney Pollack, Ron Howard, Brian Grazer, Barry Diller, Jeffrey Katzenberg, Terry Semel and other Hollywood insiders have become regulars at the Allen firm’s annual investment seminar, held every July in Sun Valley.

Invitations to the weeklong event are limited for the most part to about 100 major money managers and corporate chief executives. Power brokers and their spouses golf, play tennis, shoot skeet and discuss the future of American business. But a major attraction, maintains Grazer--whose Imagine Films Entertainment was launched by Allen & Co.--is Herbert Allen’s personal magnetism.

“He has an aura of power, control, and class,” says Grazer. “You want to stand in that aura.”

Less enamored of Allen are a small group of shareholders in the former Tri-Star, who filed three lawsuits in Delaware’s Chancery Court challenging the combination with Columbia.

A key contention in the complex dispute is that Allen--who is not named as a defendant--wasn’t an impartial adviser when his firm rendered a fairness opinion to Columbia Pictures Entertainment directors on the transaction, and received $5 million in fees, because he was intimately involved with the business of both Tri-Star and Coke.

Allen & Co. received an additional $2.5 million in fees for advising Columbia on the sale of assets in 1988. Another company owned by Herbert Allen got $2.5 million from Columbia in return for an interest in an airplane he had previously co-owned with the studio. In previous years, moreover, Allen & Co. received substantial income from co-underwriting a major Coke securities sale, and from its involvement with various Delphi Film Associates partnerships, which raised movie funds for Columbia and Tri-Star.

One suit, in which Columbia’s motion to dismiss was denied earlier this month, specifically charges that the merger terms unfairly favored Coke stockholders because they were based on the relative book value of Tri-Star and Columbia assets--and no sooner was the new company formed, than it wrote down Columbia assets by $200 million, or more than 25%, to reflect losses on David Puttnam’s movies.

Columbia has contested the claims, maintaining, among other things, that the terms were based on more than just the book value. A Columbia spokeswoman says company policy prohibits comment on pending litigation.