A TV TITAN WAGERS A WAD ON MOVIES Lorimar-Telepictures makes a ton of money producing and distributing such TV hits as Dallas and The People's Court. Unsatisfied, chief Merv Adelson is trying to expand in theatrical films. The profits are potentially huge -- but a lot less certain.
By Stratford P. Sherman RESEARCH ASSOCIATE Susan Caminiti

(FORTUNE Magazine) – THE SIREN SONG of the Hollywood big time holds Lorimar-Telepictures Corp. in its sway. The company springs from the February merger of two television powerhouses: Lorimar Inc., a top producer of network series best known for Dallas, and Telepictures Corp., a remorselessly aggressive marketer that sells TV shows directly to stations. Together, with an unmatched 21 1/2 hours of freshly produced shows airing weekly, this entrepreneurial upstart wields as much clout in TV as the major film studios that are its main competitors. Wall Street is enchanted with the company and with TV, the safest and most lucrative segment of show business. But this achievement does not satisfy Lorimar co-founder Merv Adelson, 56, the straightforward, often brilliant chief of the merged enterprise. He wants to make movies too, a glamorous but treacherous endeavor that has sunk sound companies before. Against long odds, Adelson is betting he can win Lorimar-Telepictures the status of those overlords of entertainment, the top studios. But in its 17 years before the merger Lorimar consistently flopped in films, and the cyclical movie business is a sucker's game just now. Making and marketing a major feature film costs roughly $20 million, more than most films can recoup in a market currently inundated with pictures. This year the company plans to make five movies. Up to now Lorimar has released 24 -- from 1979's Oscar- winning Being There to the aptly named Urgh -- for a loss of about $12 million. Half the loss stems from Lorimar's latest, Power, a tale of political intrigue that has been dying in theaters since February. Says Barry Diller, head of the Twentieth Century-Fox studio: ''Theatrical motion pictures are the big game in entertainment, but not necessarily the most profitable.'' By contrast, Lorimar's mainstay of producing TV series for networks has proved a virtually unbeatable business. Few companies understand the subtle art of persuading NBC, CBS, or ABC to air their untested shows. But Lee Rich, 66, a bearlike, irascible charmer who founded Lorimar with moneyman Adelson and a third partner in 1969, mastered the art decades ago. Close to program buyers, ex-adman Rich has sweet-talked the networks into running eight of his series, more than any competitor but MCA's Universal Pictures can claim. Some of the shows have made a lot of money for the networks. Three are those long- running chronicles of wickedness and wealth, Dallas, Knots Landing, and Falcon Crest, all on CBS. The rest are new, including the potential comedy hit Valerie. Networks usually ante up the bulk of a series' production cost and cancel low-rated shows in a hurry, so it is difficult for Lorimar to lose much on a flop. On a hit, however, the company can score big by selling rerun rights directly to TV stations, known as syndicating a show. Lorimar has sold reruns of 161 Dallas episodes for about $80 million so far. The beauty of the business is that most syndication revenue is pure profit; by Federal Communications Commission decree the networks that finance shows cannot share in this money. The merger with Telepictures is designed to solve such problems as Lorimar faced in this video lotus land. By last September, when merger talks started, Lorimar was fast running out of network hits to syndicate. Most of the Dallas riches appeared on the company's books last year, and episodes of Knots Landing, a lower-rated show, were selling for 60% less. Adelson knew that Lorimar's most recent hit, Falcon Crest, which debuted five years ago, would be the hardest sell of all because program buyers at TV stations were hungering for situation comedies. Two peculiarities of the rerun business made Lorimar's position tougher. Stations usually air reruns in five-day-a-week ''strips.'' That practice consumes episodes so fast that TV stations are reluctant to buy even network megahits unless they run three seasons and accumulate about 75 episodes. So Adelson knew that no matter how popular Lorimar's new network series might prove, they would not be ready for syndication before 1988. The second difficulty stemmed from accounting rules. After selling a batch of reruns to a station, a producer usually must book all the revenues the deal calls for when the first episode airs, even though the cash from the station arrives in a steady stream of equal monthly payments that lasts for years. So while cash from rerun sales was sure to keep Lorimar liquid, the company's reported TV profits were likely to drop. By October, just before the merger was announced, the price of Lorimar's stock had slumped to eight times earnings per share from 14 times just over a year earlier. Enter Telepictures, whose reliable 50% annual earnings growth had helped win it a price-earnings multiple of 16. Founded in 1978 by a group of self-styled ''corporate refugees,'' the company specializes in syndicating shows -- any shows. In addition to network reruns, Telepictures sells old movies and so- called first-run syndication shows, produced expressly for sale to stations rather than to networks. Telepictures began as a distributor of other companies' shows, collecting fees that can range heavenward from 30% of the prices stations pay. The company's unstoppable salesmen proved their mettle by profitably selling highbrow movies such as a production of Eugene Ionesco's play Rhinoceros -- outright junk by TV standards. Telepictures struck gold in 1981 when it began distributing a first-run syndication show called The People's Court, on which real people abase themselves by airing their petty civil-court disputes before a retired judge and an audience of millions. This makes for great TV: People's Court is the No. 10 show in syndication. So far Telepictures' distribution fees from it total an estimated $30 million. To goose profits while ensuring a supply of product for its knock-'em-dead sales force, Telepictures began producing its own shows in 1981. Four young executives ruled Telepictures by majority vote: Chief Executive Michael J. Solomon, 48, President Michael N. Garin, 39, Vice Chairman David E. Salzman, 42, and Executive Vice President Richard T. Robertson, 40. Encouraged by surging demand for syndicated programs, they decided to get their feet wet by making programs for first-run syndication. Of the nine shows they made, only a cartoon series called Thundercats has earned high ratings, but innovative dealmaking won Telepictures something almost as valuable: guaranteed access to the airwaves. In a model Telepictures deal the company gives a few key stations a modest share of profits from a new show in return for a run of up to three years. Often the station pays no cash for the show. Instead it lets Telepictures keep part of the program's commercial time for sale to advertisers. If ratings are wretched, Telepictures suffers as much as the station and has a strong incentive to provide a better replacement. If ratings soar, Telepictures sells those commercials for large sums, and it may be able to sell reruns of the program later. Telepictures' next goal was to make network programs, which it could later syndicate. ''We had to be in the network business,'' says Michael Garin, who wears preppy bow ties, penny loafers, and horn-rimmed glasses despite his long exposure to Hollywood fashions. He previously worked in TV syndication for Time Inc., owner of FORTUNE, and before that was assistant to FORTUNE's publisher. Hit network shows command more money in syndication than any other programming. But Telepictures could not crack the network market. Enter Lorimar. Last September leaders of the two companies met while negotiating a deal in which Telepictures will sell Lorimar's Falcon Crest reruns in syndication. Then their top executives -- Adelson, Rich, and the four Telepictures chiefs -- held a two-day meeting at New York's Helmsley Palace hotel that a participant remembers as a grueling ''encounter session.'' Having recognized that their companies neatly meshed, everyone agreed a merger made sense. WHILE A HURRICANE raged outside, the six men munched room-service food and roughed out a way to combine their companies without crushing anyone's ego. In the resulting deal Lorimar technically merged into Telepictures but ended up on top. Each Lorimar share was exchanged for 2.2 new shares of Telepictures; then Telepictures changed its name to Lorimar-Telepictures. Before the announcement Lorimar was selling at $32 a share and Telepictures at $18, so the exchange ratio represented a 24% premium for Lorimar stock. Merv Adelson, the largest shareholder in Lorimar-Telepictures, has benefited most. His 6.5% stake is worth $58 million, up 86% since October. That's not bad for a guy who started out delivering groceries (see box). Adelson is also clearly in charge. Below him, Rich and the Telepictures foursome form an office of the president. This setup, which allows each of these five less power than he had in his former company, could breed discontent. But Adelson knows he needs them to keep him in the chips while he takes on the major studios. He has the advantage of being adept in personal relations, as he has demonstrated in his 17-year partnership with the often cantankerous Rich. And Adelson's five subordinates share a strong incentive to stay: each has the bulk of his wealth tied up in company stock, which could lose value if any of them left. The combined company looks like a rare case of true synergy. It recently decided to produce three sitcoms for first-run syndication, two of which were dropped by networks after at least a season on the air: Mama's Family and It's a Living. Producing the three shows costs $30 million a season and no network is footing the bill. Telepictures would not have risked so much alone, and Lorimar's profit might have evaporated if an independent distributor got a big chunk of the proceeds. Product-hungry Telepictures salesmen are already hawking the shows. The company's broadened base should help it meet some worrisome trends. Networks are covering a shrinking portion of series' production costs. New competition is squeezing syndicators' profit margins. And new tax legislation is expected to eliminate the investment tax credit for TV and film production, which has kept Lorimar's tax rate under 20%. Lorimar-Telepictures has established beachheads in other businesses that fit into Adelson's vision of a top-notch entertainment company. It owns Bozell Jacobs Kenyon & Eckhardt Inc., a modestly profitable but fast-growing advertising agency that last year ranked 12th in U.S. billings. In addition the company owns a minor videocassette outfit best known for Jane Fonda fitness tapes, which has just entered the mainstream business of selling movie cassettes. The company has five small TV stations and a few magazines, including one about Barbie dolls and 75% of Us. FINANCIALLY STRONG, the company is getting stronger. It is exchanging outstanding bonds for newly issued shares; since the bonds have effective interest rates over 19%, retiring them will save so much money that the exchanges will not dilute per-share earnings. Assuming the stock price holds up long enough for the company to retire all its bonds, LorimarTelepictures will end up with about $500 million of equity and less than $100 million of debt. That solidity is extraordinary in the highly leveraged entertainment industry. So why would the managers of this happy creation want to enter a risky business like movies? Adelson, whose ambitions are as big as all outdoors, wants to take a shot at the major-studio big time. Says William Hayes, a lawyer who introduced Adelson to Rich: ''Merv always wanted to be in the movie / business.'' Adelson's desires nearly broke up his partnership with Rich in 1980, according to insiders. They say Rich feared Adelson's movie investments would jeopardize the business Rich had built on television. Both partners vehemently deny this. But when Lorimar went public in 1981, its debt-to-equity ratio exceeded 3 to 1, and the debt was for movies. The next year, bad luck in movies forced Lorimar's profits down 84%. For the first time Adelson, who combines passion with sound business sense, has gathered the means to buy his way to major-studio status if necessary. Perhaps also for the first time, he has a credible strategic justification for making movies: the strongest studios are increasing their power at the expense of weaker competitors, so Adelson may not have much time to join their ranks. ''It's not hard to produce a movie,'' says a studio chief. ''If you've got the money, someone will sell you a script.'' But Lorimar-Telepictures is still missing something every major studio needs. Unlike the studios, the company has no organization to distribute pictures to U.S. theaters, the most important market for films. In return for the marketing of a motion picture, which can easily cost $10 million these days, distribution companies typically pocket 30% of receipts from theater owners. In the boom-and-bust movie industry, those fees often make the difference between a profit and a loss -- or between a merely handsome profit and a bonanza. To keep from losing the whole 30%, Adelson has carved out a clever deal with Twentieth Century-Fox. Fox distributes his films at a cut rate; Lorimar- Telepictures has to pay for advertising but controls the marketing strategy. The deal will increase LorimarTelepictures' risk, but also its share of what Hollywood types lovingly call the upside. Pressed to discuss the downside, Adelson insists his company cannot lose more than $15 million annually on movies, even if every picture performs as poorly as Power. That amounts to about 20% of Lorimar-Telepictures' estimated pretax income for the fiscal year that ends next March. But the real downside is still incalculable. Adelson knows that to be a major studio, his company must soon establish its own U.S. theatrical distribution. The cost of achieving that, whether through acquisition or by building from scratch, could be enormous. All the reasons for regarding Adelson's bet on movies as foolish will be forgotten if the bet pays off, and it may. In a couple of years the cyclical movie business will be due for an upturn, and major studios will stand to earn staggering profits. Becoming one of the majors will require outstanding management and a whole lot of luck. The odds against him may be long, but those TV profits should let Adelson keep betting for years.

CHART: INVESTOR'S SNAPSHOT LORIMAR-TELEPICTURES SALES (12 MOS. ENDED 10/26/85) $620.5 MILLION 1 CHANGE FROM YEAR EARLIER N.A. NET PROFIT $30.1 MILLION 1 CHANGE N.A. RETURN ON COMMON STOCKHOLDER'S EQUITY 13% 1 FIVE-YEAR AVERAGE N.A. RECENT SHARE PRICE $27.25 PRICE/EARNINGS MULTIPLE N.A. TOTAL RETURN TO INVESTOR'S (FROM MERGER TO 4/11) 2 12% PRINCIPAL MARKET AMEX 1Pro forma combined results of Lorimar and Telepictures. 2Companies merged 2/16/86. BOX: A LONG, STEEP CLIMB FROM THE GROCERY STORE Mervyn Lee Adelson -- don't call him Mervyn to his face -- nearly has it all. In addition to his $58-million stake in Lorimar-Telepictures, he owns a lot of real estate in Las Vegas and California, including 30% of the luxurious La Costa hotel and spa near San Diego. He owns four homes: in Malibu, Bel Air, New York City, and Aspen. He works hard, vacations often, forms close friendships, and enjoys nearly as much prestige in show business as the top studio chiefs. His climb, long and steep, is the subject of nasty gossip. Merv, as he is known to friends and employees, is the son of a Russian- immigrant grocer who set up shop in Beverly Hills. At 13, before he had a driver's license, Adelson began trucking groceries to the lavish homes of Hollywood's stars. He dropped out of college after three semesters. A gifted athlete, he played semi-pro baseball but gave it up. ''I couldn't hit curve balls,'' he says. Kicking around for something to do, he ran a grocery store his family owned, then sold liquor to bars for a distillery. At 22 Adelson borrowed $10,000 from his father and started the first 24-hour grocery in Las Vegas. The store was such a success that Adelson built two more. Through Allard Roen, a golfing buddy who ran the Desert Inn casino, Adelson struck a deal to build houses around the casino's golf course. His partner in the venture, and in every Adelson venture since, was Irwin Molasky, then a small-time but experienced builder. Soon Adelson and Molasky started building a private hospital. To complete that project they had to raise more money, so they took in investors, including Roen and Morris Dalitz, a Desert Inn owner. Later they borrowed from the Teamsters' Central States Pension Fund. Adelson and Molasky included Roen and Dalitz in many subsequent real estate ventures, including La Costa, which also borrowed from the Teamsters' fund. In 1975 Penthouse magazine published an article about La Costa that made the project's partners, including Adelson and Molasky, sound like mobsters. In 1962 Roen had pleaded guilty to a misdemeanor in a criminal stock fraud case and been fined $10,000. Dalitz, though never indicted, has frequently been labeled an associate of top organized crime members. And as recently as March, a presidential commission described the Teamster leadership as ''firmly under the influence of organized crime since the 1950s.'' Adelson and his partners filed a $630-million libel suit against Penthouse. After ten years of litigation costing Adelson and partners $7 million, the parties settled out of court last year. Neither side got a dime. Penthouse signed a strong statement that verges on a retraction, but did not have to publish it. In the statement, which Adelson has not released until now, Penthouse said it ''did not intend for its readers to believe that Messrs. Adelson and Molasky are or were members of organized crime or criminals.'' Friends such as actor Mike Connors (Mannix) say the case profoundly depressed Adelson. ''What a waste,'' Adelson says of it. He is still in the real estate business with Roen, but Dalitz is no longer his partner, and the Teamsters' + loans were repaid long ago. Gossips still link Adelson, and even Lorimar- Telepictures, with organized crime, but when asked by FORTUNE for substantiation, the gossips did not provide it.