Pooh, Edgar, and Mel
Three entertainment industry battles liven up a sleepy summer.
(Fortune Magazine) -- Summer was once a quiet time in the media world. "Things used to slow down," an ad agency honcho sighed the other day. "You used to be able to leave early on Friday afternoon." Not this year. While executives may long for an escape to the beach, they've got some heated conflicts to resolve first. A sampler:
These should be happy times for Walt Disney Co. and Winnie the Pooh. After all, everyone's favorite silly old bear celebrated his 80th birthday this past December and shows no signs of slowing down. But this anniversary year has been marred by the U.S Supreme Court, which recently dealt a blow to Disney's efforts to ensure that Pooh keeps churning out the bucks. Disney pays royalties on a large part of its Pooh sales to the heirs of Stephen Slesinger, a literary agent who bought the merchandising and other rights to Pooh from author A.A. Milne. Slesinger died long ago, but his wife, Shirley, and their daughter, Pati, are still very much around. They claim that Disney has cheated them out of more than $1 billion in royalties. Fifteen years ago they filed a lawsuit that they hope could one day persuade a judge to break their company's contract with Disney (Charts) so that they could shop Hollywood's most bankable bear to rivals like Universal or Warner Bros.
I wrote a lengthy article about the Pooh case in 2003, and I've been intrigued by it ever since. At the time, Stephen Slesinger Inc. v. Walt Disney was the longest running case in Los Angeles County superior court history. It was more Grisham than Milne. Both sides claimed Pooh as their own, and they were each determined to go to almost ridiculous lengths to control him. The Slesingers seemed about to prevail when a Los Angeles County judge sanctioned Disney for destroying some 40 boxes of documents that their lawyers argued may very well have held crucial evidence in the case. A different judge, however, threw out the entire case in 2004 after Disney complained that the family had obtained confidential documents from its trash. (Oh, bother!) Where does the Supreme Court come into this muddled picture? The high court's ruling involved a different case--one that Disney funded in 2002 seeking to terminate the Slesingers' Pooh rights under U.S. copyright law. The plaintiff was Clare Milne, the Pooh creator's granddaughter. It was never clear how much Clare understood of these complex proceedings. At the time her mother said she was in a nursing home and didn't understand the difference between 1,000 pounds and one million pounds. But Disney claimed Clare had agreed to sell the Magic Kingdom the rights to Pooh if she prevailed. Clare's attorneys took the case all the way to the Supreme Court after they failed to persuade a federal district court judge to cut the Slesingers out of the picture. But in the end the justices declined to hear it.
That means Disney still has a Pooh problem. It continues to pay royalties to the Slesingers. The family uses those considerable sums to fund its legal crusade. As you've probably already guessed, the Slesingers are appealing the dismissal of their Los Angeles County suit. As long as they have enough money, they will come after Pooh in court. Disney is fighting back. But perhaps it's time for Disney to take a different approach. This battle feels like a hangover from the Michael Eisner era, when Disney used scorched-earth tactics in most adversarial situations. Now Bob Iger, Eisner's successor, is making peace with some of the same people with whom the company was once at war. There may be no way to do that with Pati and Shirley. But it's worth a try.
For years EMI (Charts) has been trying to buy Warner Music Group (Charts). So it was no surprise when the British company made a $28.50-a-share offer for the smaller rival in May. Warner's response wasn't expected: It offered to buy EMI instead. There has been a flow of stories ever since describing this impasse as an ego battle between EMI chairman Eric Nicoli and Warner CEO Edgar Bronfman Jr. Nicoli supposedly feels he is fated to preside over the merger, which would combine EMI's roster of artists like Coldplay and Norah Jones with Warner stars such as the Red Hot Chili Peppers and James Blunt. Bronfman is said to believe just as strongly that he should be king.
I don't think this is an ego battle. It's an extremely tough negotiation. Bronfman and his backers--Thomas H. Lee Partners, Bain Capital, and Providence Equity Partners--have been expecting EMI to knock on their door for quite a while. They weren't about to take the company's first offer. They acted as if they were insulted when EMI came back with an all-cash offer of $31 a share, or $4.6 billion. Warner was cheeky enough to offer the same amount for EMI. (Warner insists it is seriously interested in acquiring its rival, and it has since sweetened its bid a tad.)
It's easy to see why Bronfman feels he is in such a strong position. EMI has been on the hunt for a merger partner for years. It tried to buy Warner in 2000 from Time Warner (Charts) (owner of Time Inc., Fortune's publisher), only to have the deal scotched by regulators. Three years ago, EMI offered to pay more than the Bronfman group for Warner. But Time Warner didn't want the regulatory hassles that time. So Bronfman and his backers got the music company for $2.6 billion.
Now they seem likely to almost double their money by selling to EMI. But they shouldn't be too greedy. Bronfman has to be careful. He's revived Warner by cutting costs and boosting digital music sales. But for months Warner's stock has been buoyed by merger speculation. If EMI walks away, Warner's shares are likely to tumble. If Bronfman lets that happen, maybe this is all about ego after all.
RADIO WARS Here's another potential corporate marriage that has people talking. Don't expect to see it consummated anytime soon though. A couple of weeks ago, Sirius Satellite Radio (Charts) CEO Mel Karmazin told analysts that his company would "love to buy" its rival XM Satellite Radio (Charts). He quickly added that there would "definitely" be regulatory issues. But it didn't matter. Shares of Sirius and XM rose 5% and 6.8%, respectively, the same day. Why the uptick in the share prices? One of the few things that gets investors excited about satellite radio these days is deal talk.
Both Sirius and XM have been taking a beating on Wall Street lately. XM's shares have lost about half their value since the beginning of the year. Sirius's stock price has declined by almost 26%. Sirius and XM say they expect to have a positive cash flow by the end of this year. But neither one is profitable now. There are also signs that the industry's growth may be slowing. In May, XM, the bigger of the two companies, with 6.9 million subscribers, said it would end the year with 8.5 million subscribers--500,000 fewer than it had originally projected.
Sirius, which has 4.7 million subscribers and Howard Stern, has been trying to exploit this situation. Karmazin immediately put out a statement after XM's announcement saying that his company isn't seeing any slowdown. (Never mind that it spends twice as much as XM to acquire subscriptions.) The Sirius CEO recently bought one million shares of his company's stock. He is also subtly reminding investors with comments like the one he made on June 26 that, unlike XM CEO Hugh Panero, he is a deal guy. In the '90s, Karmazin built Infinity into a terrestrial radio powerhouse through mergers and acquisitions. He eventually sold the Infinity stations (along with CBS, which he picked up along the way) to Viacom in 2000. Maybe he can do something similar with Sirius. Surely that's what Karmazin would like investors to think about instead of the red ink at Sirius.
From the July 24, 2006 issue