Australia’s Other Billionaire Mogul

Comparisons of media entrepreneur Kerry Stokes and his Australia-born competitors, Kerry Packer and Rupert Murdoch, are inevitable.

Murdoch controls one of the largest media companies, News Corp., and Packer has Australia’s largest media concern, Publishing & Broadcasting Ltd. Stokes’ Australian Capital Equity covers mining equipment and shopping centers, with just 25% of its holdings in media.

In Hollywood, Murdoch has Fox Studios and Packer is an investor in New Regency, but Stokes beat out both in his bid last year for MGM.

Packer and Murdoch were brought up in privileged surroundings, while Stokes was adopted by poor parents and left home to become a sheep shearer at 14. Stokes speaks in a measured, hushed tone, which is a long way from the ferocity of Packer or the terseness of Murdoch.

Over breakfast recently in his Sydney office, housed in a penthouse with the best view of the harbor money can buy, Stokes admits he tries not to raise his voice. “I like to think I work with people and I encourage disagreement. . . . If you end up with an organization where everyone agrees with you, it could be dangerous.”

Those soft tones should not fool anyone, least of all those at MGM, where Stokes invested $250 million as part of Kirk Kerkorian’s successful $1.3-billion bid last year. His foray into the movie business has pushed him closer to the media spotlight than ever before, and it is clear that one thing he does have in common with Murdoch and Packer is the ability to play hardball.

Indeed, Stokes is locked in a bitter legal battle in Australia’s Supreme Court with Packer over Australian pay television company Optus. He claims that rumors about trouble at MGM have been stirred up by Packer and his representatives in Hollywood.

Stokes is emphatic when he says that he is not looking to unload his investment in MGM, which he says was a good buy.

“As outsiders buying into Hollywood, we are the only people who have purchased from a bank [Credit Lyonnaise], which by their very nature are not good sellers of anything,” he explains. “Four months before the bids closed, everyone was tipping MGM would sell for $2 billion. We ended up paying $1.3 billion for the whole company. Our own internal valuations valued the library at more than that total purchase price.”

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Stokes said MGM is on track with its business plan, which includes some cost-cutting, a concept that doesn’t sit well in Hollywood.

“All management today in every industry is cost-conscious, but if you say in Hollywood you are going to look at costs, everyone interprets that as an indication that you are closing down,” Stokes explains. “[MGM Chairman] Frank [Mancuso] has had no instructions to do anything other than the business plan he put to us and has full authority to green light any project.”

Stokes’ position as an outsider in Hollywood and his pairing with Kerkorian have made the investment community in the U.S. and Australia wary of the MGM purchase.

“There is a certain mystique about Hollywood, and there is also the perception that Australians don’t do well investing in this area. The fact is that we made a decision, which was based not only on whether MGM enjoys success at the box office, but whether it continues to maximize the value of its library.”

The library is key to Stokes’ investment and provides a vital link to a studio that supplies much of the key programming for Australian television, where Stokes controls the No. 2 commercial network, Seven. “Television as a medium chews up material faster than anything else, and the primary attraction for the Seven Network was that MGM has the best post-1950s library around, and that becomes more valuable as time goes on.”

The preoccupation with the growing cost of movie making misses Stokes’ strategy, he says: “Most analysts, when they look at our MGM investment, are concentrating on the fact that the cost of making movies continues to rise. I sincerely hope that is true. With 1,700 movies in the library, every time you increase the cost of making them you disproportionately increase the value of that library.”

Stokes also has great hopes for MGM’s growing television production arm, which has recently established the cable and syndication series “Outer Limits,” “Stargate” and “Poltergeist.” This product line will not only feed Stoke’s Seven Network but also will help fill what he sees as an “insatiable appetite for one-hour shows worldwide.”

Australian television’s historical reliance on Hollywood output is important to understand in terms of the Seven Network-MGM deal. For the last 30 years, the three Australian commercial networks--Seven, Nine and Ten--have depended upon large output deals with U.S. studios to drive their schedules. A bidding war for Hollywood output in the late 1980s sent Seven and Ten into bankruptcy, which resulted in all the networks defaulting on studio product.

The competition remains intense. Ten re-signed its output deal with Columbia TriStar this month, beating out Seven, which found the terms too rich. In some ways, the rivalry for output deals goes deeper than commercial competition, and the battles between Packer, Stokes and Murdoch have become legendary.

“I have known both Rupert and Kerry since I have became involved in television and have been in disputes with both sides. . . This week it’s civil between us, but who the hell knows what will happen next week?” he asks.

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Hollywood beware: Underestimating Kerry Stokes can be a dangerous business, as both Rupert Murdoch and Kerry Packer have found in the past year.

Packer, a shareholder in New Regency Studios and the owner of Nine Network, Australia’s most successful television network, is facing Stokes in court in Australia this month in a bitter dispute over the ownership of the pay television service Optus Vision.

Murdoch, who holds a 13% stake in the Stokes-controlled Seven Network, also faced legal action from Stokes, after making a deal with the Nine Network for Fox product held by Seven. Stokes served a writ on his fellow shareholder in Seven, Murdoch, before the wrangle was resolved out of court with Seven holding onto the Fox supply.

Stokes points to a major difference between his and Murdoch’s approach to business. “I am single-minded, compared to Rupert. I have always concentrated on making sure we do one thing at [a] time properly, rather than look at the wider canvas like Rupert does.”

He describes their different backgrounds in management speak: “Your background advantage normally is in opportunity cost, and a lot of people are straddled with higher opportunity cost than others. If you don’t have anything, that is quite often an advantage.”

When asked about Kerry Packer’s legendary barking, he says, smiling, “I guess that has something to do with being brought up in a certain way. If you were brought up to believe everyone else is a servant, then I guess you are going to treat everyone like servants.”

Stokes suggests that, for him, MGM is one of many businesses that hold equal interest. He is as happy “touching the metal” on one of his Caterpillar mining machines as he is visiting Hollywood, where he finds the people “pedantic.”

“I visit Los Angeles at least four times a year for quarterly MGM board meetings. I have a house in Beaver Creek, which is only a couple of hours away and that is a real nice incentive to visit L.A. more regularly.”

The long-term plans for MGM? “We would like to see the company float [go public], but that is some years away and we would look at some other catalyst such as an acquisition as the reason for having an IPO.”