Multimedia Mulling Major Modifications

Multimedia may have to change its name. In an effort to boost its stock price and its image on Wall Street, the company behind talkshow stars Phil Donahue and Sally Jessy Raphael is contemplating a corporate overhaul.

Eight months after the retirement of longtime Multimedia chairman Walter Bartlett, the company is facing decisions about the future of its businesses. Its entertainment and cable divisions, once the engine pulling the diversified company along, are losing steam. Only a turnaround in the company’s newspaper and broadcast divisions helped keep Multimedia’s profit growing last year.

But the newspaper and broadcast divisions will be challenged to continue that growth when the economy slows down.

And while Multimedia’s new chairman/CEO Donald Sbarra has a strategy for the future, some of his major shareholders have concerns about aspects of that strategy.

Their uneasiness is aggravated by the company’s performance on Wall Street, where the stock has been flat for two years and is now trading around $28. Multimedia’s stock performance has been so lackluster that options given to Donahue last year when he renewed his talkshow contract are worthless at current prices.

“People are frustrated,” says an analyst. “This company can’t remain so diversified with its five lines of business on an ongoing forward basis. They just don’t have the financial or management resources to move forward.”

Management appears to be listening, and the departure of Bartlett has opened the door to change.

In recent weeks, whispers have circulated on Wall Street that Sbarra was considering a restructuring beyond the strategies he had outlined to shareholders in the months following his appointment. That speculation increased 10 days ago when Multimedia execs told a conference call of investors that the entire structure was being reviewed.

“They were more open about the need to restructure some things,” says Sal Muoio, an analyst at Gabelli & Co., which is a shareholder in Multimedia.

Sbarra would not comment for this story, saying a discussion of Multimedia’s strategy at this time would be premature. Wall Street sources say the company has yet to make a decision about how far-reaching a restructuring will be, but at a minimum, Multimedia is expected to spin off its cable systems into a joint venture with a bigger operator.

As its name indicates, Multimedia has its hand in a lot of businesses, but it is best known for its stable of syndicated talkers that includes Donahue, Sally Jessy Raphael, Jerry Springer, Rush Limbaugh, Susan Powter and Dennis Prager.

It also owns five TV stations, cable systems that reach about 420,000 subscribers, dozens of newspapers and a home security business.

Five years ago the talkers and cable systems were the heart of Multimedia’s profit performance, while newspapers and TV stations lagged. Last year, that situation was reversed – newspapers and TV stations provided all the growth, along with the new home security system business – and entertainment and cable declined.

‘Hit a wall’

Muoio said, “Entertainment, which had phenomenal numbers in the last 10 years, has kind of hit a wall.”

“Not all the cylinders have been firing and that is a concern,” said Tim Pettee, an entertainment analyst and VP with Alliance Capital Management, the biggest shareholder of Multimedia. Pettee says, however, he is not “overly concerned” about the company’s performance and credits Sbarra with focussing the company’s strategy.

Even Multimedia admits the newspaper turnaround reflects the strength of the economy, while broadcast improvement is partly due to political advertising and partly to economic factors.

Multimedia’s best-known names – Donahue and Raphael – while strong, are not the powerhouses they once were. Multimedia blamed “continued competition in the talkshow format” and the cost of its new All-Talk Channel for a 17% drop in entertainment’s operating profit. Overall Multimedia’s net profit rose 5% to $90 million last year on revenues of $630 million, up 3%.

Donahue’s ratings are slipping and he has on occasion expressed a desire to step down within the next few years. Currently he has a one-year deal.

“Sally Jessy Raphael” is holding its own in household ratings but its audience is skewing toward older women, which is not as attractive a demographic to advertisers as younger audiences. Robert Turner, president of Multimedia Entertainment, says “Sally is pretty stable.”

Of Multimedia’s other shows, “Susan Powter” and “Dennis Prager” are likely to be canceled, says Janeen Bjork, VP and director of programming for Seltel, a TV station rep firm. Turner admits both “got off to a modest beginning but we’re working on those shows quite diligently.”

‘Donahue’ draw ‘great’

As for “Donahue,” Turner points out that “it is still a great draw” and now is “greatly differentiated from other shows.”

On the plus side, new shows including “Rush Limbaugh” and “Jerry Springer” are doing well. “Springer” has proved many of the so-called experts wrong by improving his numbers.

“They (Multimedia) have more pluses than minuses,” says Jack Fentress, VP, programming, Petry Television. “It is a class company,” he adds, although sometimes “too conservative.”

While Multimedia’s syndication division may not be as strong as it once was, any station rep will say that all it takes is one hit for the company to reclaim its position as king of the hill. The company is preparing to launch several talkshows abroad as co-productions.

“We have a dozen development deals in the works worldwide,” Turner says. “This will be a big part of our business.”

Multimedia is betting its new All-Talk Channel will give the entertainment division a new source of earnings growth. The channel, launched in October, now has about 1 million subscribers. But this is a long-term bet, estimated to cost at least $50 million before it turns a profit in four or five years. And some cable execs think it could lose $100 million before it gets into the black.

Overshadowing the channel’s future is its main rival, NBC’s America’s Talking, which reaches more than 12 million homes. Darice Grippo, president of MacDonald Grippo Reily Inc., who closely follows the stock, says “The All-Talk Channel got off to a somewhat slower start than they would have hoped.”

Making the long-term bet on the All-Talk Channel is a key element of Sbarra’s strategic plan for the company, analysts say. Another element is to grow Multimedia’s cable business, despite the widely held view throughout the cable industry and on Wall Street that small players like Multimedia won’t be able to compete in the future.

Multimedia is the 30th largest U.S. cable operator. Like the rest of the industry, its cash flow was hurt last year by rate rollbacks. That doesn’t worry Sbarra, however, who plans to spend $150 million by 1999 upgrading its cable systems to offer telephony, a plan that puzzles some shareholders.

Analysts and shareholders expect that, at the very least, Multimedia will announce a partnership deal on its cable systems in coming months.

“They realize that they can’t do the whole telephony bit without a partner – it’s too expensive,” Grippo said.

A straight sale of the cable systems might be preferable, but Multimedia’s low-cost base on cable would leave it exposed to high tax liabilities on any sale, Grippo says.

Multimedia also is enthusiastic about prospects for its home security business, which is growing through acquisition. It was a small contributor last year, but “they view the home security business as having tremendous potential…. They can see that being the largest business division within five years,” Grippo says.

Wall Street would clearly prefer a more radical restructuring than simply a spinoff of cable.

But most analysts and shareholders acknowledge that the company is too conservative to make dramatic moves. However, one analyst says, “There is a fair amount of handwriting on the wall. This is a company that needs to be shaken up.”

The board has historically been resistant to change, but some observers say that is changing. “The reality of the late 20th century is starting to crash in on Greenville, South Carolina,” said one shareholder.

John Dempsey, New York, contributed to this report.

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