Chapter 646: The SEC's Bad Habits

[Chapter 646: The SEC's Bad Habits]

After returning empty-handed from Universal, Ron Perelman faced another setback at Warner Bros., as CEO Terry Semel was too embroiled in troubles to deal with him.

Thanks to a series of blockbuster hits, the North American summer box office in 1994 was on track to break the $2 billion mark for the first time. In addition to the shining success of Firefly Group, Universal, Paramount, and even the long-dormant MGM saw good returns this summer. However, Warner Bros., which had solidly held the top market share position just a few years back, could best be described as dismal.

The Western film, Maverick, which kicked off the summer on May 20, received decent reviews, but it was crushed in the latter half of the season by heavy hitters like The Mummy, Saving Private Ryan, and True Lies. Initially projected for a $100 million take, it ultimately fell short, netting less than $60 million. The next major Western, Wyatt Earp, bombed even harder, wrapping up with only $25 million. Although the upcoming release of The Client in late July was expected to surpass $100 million, Warner's cumulative box office for the summer was still under $200 million. The market share was poised to dip below 20% for the first time, even below 10%, marking a significant decline over the last five years.

Faced with such a steep decline, new CEO Terry Semel found himself immediately on the receiving end of queries from shareholders and the board. Competitors, who had lost to him in the race for the CEO position, were already beginning to stir. In light of the situation, despite Warner's capacity to steal Marvel from Firefly Group, Semel had to tread carefully, fearing he could not afford the millions in liabilities associated with the mess that Marvel had become.

...

Soon after, Ron Perelman's request to meet with Paramount CEO Sherry Lansing went unanswered. Three days passed, and as Perelman anxiously contemplated returning to New York for support or seeking out major studios that had close ties with Firefly to explore collaborations, a phone call from Viacom CEO Sumner Redstone offered renewed hope.

At Paramount's headquarters on Melrose Avenue in Hollywood, Perelman found himself in an office meeting with both Sumner Redstone and CEO Sherry Lansing.

After pleasantries, they settled into the sofas in the meeting area. Before Perelman could deliver his prepared remarks, Redstone got straight to the point: "Ron, I've been briefed on the recent events. You want a seat on the board of Firefly Group as a creditor, but you're entangled due to Marvel's debts. Paramount can help you out, and we can both benefit. What do you think?"

Perelman initially had grand ambitions but suddenly felt something was off. After Firefly expressed interest in Marvel, he altered his plan, hoping to leverage his credibility as both a creditor and Marvel's owner to secure positions on Firefly's board and as a shareholder.

Yet, it seemed these powerful potential partners would only offer him one route. Redstone continued without waiting for an answer: "Paramount can buy Marvel and take on all its debts, and then you can pursue what you want without any burden. What do you say?"

After hitting dead ends multiple times, Perelman recognized some hard truths. Having made a billion-dollar fortune from scratch on Wall Street, he knew he needed to be decisive. Quickly weighing his options, he realized that dropping Marvel would remove the leverage Firefly had over him. With the backing of his creditor coalition and Disney's animation department, he still stood a strong chance of landing a board position at Firefly.

Choosing between the top seat in North America's leading media group and a faltering comic company seemed obvious even to the most naive observer.

Perelman swiftly resolved, "Mr. Redstone, what's Paramount willing to offer?"

Redstone replied, "One hundred million dollars."

Hearing this price, Perelman nearly leaped up in disbelief. One hundred million? Was he kidding? Six years earlier, Perelman had bought Marvel for $80 million. In the following years, to craft an illusion of rapid expansion for investors and issue bonds successfully, Marvel had acquired several animation and toy companies, adding more to its costs than $100 million.

Though Marvel was currently facing dwindling share prices and a debt crisis, its net worth was still undeniably over $100 million. The offer from Redstone felt practically like robbery.

Suppressing his urge to storm out, Perelman trembled as he spoke, "Mr. Redstone, don't you find that offer a bit lacking in sincerity?"

Redstone, seemingly unphased by Perelman's expression, asserted, "That price is reasonable. Although Marvel's market value may be higher on paper, once Viacom acquires Marvel, if it fails to deliver its expected worth, Viacom would have to handle over $500 million in additional debt. It's a highly risky venture."

Perelman countered, "Eric Williams spent nearly $500 million in cash to acquire Marvel. Doesn't that indicate its value?"

Redstone scoffed, "Once Firefly controls Marvel, you'll have to relinquish any debt financing you took from Marvel and you'd be under investigation by the SEC. Selling Marvel to Viacom would exempt you from such scrutiny."

Perelman fell silent. His greatest fear was precisely this; the SEC had a troublesome tendency, much like the IRS, to investigate all past transactions once they discovered an issue with one. If MacAndrews & Forbes Holdings could manipulate Marvel to siphon off hundreds of millions, the nature of those previous deals was hardly innocent. After all, Perelman wouldn't have accumulated his current wealth without those shady practices.

Minutes later, he said, "I need to think this over."

Redstone nodded, "Of course. Viacom has the patience, but your competitors -- Firefly Group, Berkshire Hathaway, and State Street Global Advisors -- won't afford you much time."

Perelman replied coldly, "I don't need you to remind me of that, Mr. Redstone."

...

Leaving Paramount's offices, Perelman stood in the warm August sunshine of Los Angeles but felt an inexplicable chill wash over him. He yearned for Wall Street in the '80s, when Drexel Burnham Lambert was thriving, and hostile takeovers were rampant. He could effortlessly raise endless capital through junk bonds for expansion. But all that shattered with the stock market crash of the late '80s; Drexel collapsed, the junk bond market shrank, and his rapid expansion ground to a halt. Once, even the heads of super corporations had to tread carefully upon hearing his name, but now he felt disregarded and ridiculed by these insufferable Hollywood insiders.

As he reminisced about those golden days, Perelman quickly resolved to return to New York -- back to Wall Street. Perhaps those tycoons were greedier than their Hollywood counterparts, yet at least it was his territory, his stage, where he could adeptly navigate its rules.

...

Back at Paramount, Sherry Lansing watched Perelman leave from the office's floor-to-ceiling window and asked Redstone beside her, "Do you think he'll sell Marvel to us?"

Redstone observed the departing luxury car and replied, "Hard to say, but if we could get it, it would play a crucial role in Viacom's next phase."

Lansing nodded in agreement, noting that Viacom had held a meeting specifically to discuss Marvel.

Marvel's current structure resembled a miniature Disney; although small, it encompassed the various departments a comprehensive entertainment company needed -- film, television, music, comics, and toys. Viacom was hardly interested in Marvel Entertainment's lackluster film divisions. What they really needed was Marvel's superhero rights, and, by extension, their toy company. The revenues generated annually from Firefly's Disney-affiliated stores were an enviable sum for nearly any Hollywood company. Other major studios had never ceased their attempts to enter that business, and Viacom was no exception. Since acquiring Blockbuster, Viacom executives had aimed to use Blockbuster's retail distribution system to expand Paramount's film merchandising.

With the hardware set, Viacom soon found that Paramount had barely any quality films suitable for merchandising. The recent hits that had financially rewarded Firefly, like Jurassic Park and Toy Story, were non-existent in Paramount's catalog.

Thus, when Marvel Entertainment was suddenly highlighted amid the discussions surrounding Firefly, Viacom executives recognized Marvel's potential. Marvel's popular comic book characters and its toy company could provide a wealth of content for Viacom's merchandising plans. Moreover, if they developed a series of films featuring Marvel's superheroes that could rival Warner Bros.' Batman, it would streamline Viacom's entire industry chain from films to toys.

Redstone stood lost in thought for a moment and abruptly asked, "Sherry, do you have any idea what that young guy has been up to recently?"

Lansing shook her head, "If it were me, I'd find a way to stabilize Disney's animation division and handle the pressure from creditors. Firefly just merged with ABC and still managed to report $657 million in net profits for the first half of the year. Looking ahead, most of the summer blockbuster hits, fall television seasons, and holiday releases are all concentrated in the latter half. The profits for Firefly Group in the second half could be even more substantial. With such confidence, as long as Firefly holds onto Disney's animation department, they wouldn't need to worry about creditor pressures. Yet, Eric Williams seems not to do any of that. It feels like..."

Redstone completed her thought, "Like he doesn't care about Disney's animation department at all, right?"

Lansing nodded, "We all know Firefly originally planned to shift Disney animation toward 3D production, but after The Lion King, I believe anyone with a shred of common sense wouldn't continue along the same path."

Redstone said, "If that kid doesn't care, then we could snatch Disney's animation division away from him."

"I had Peter explore that possibility, and I'm certain others have made attempts to poach talent as well," Lansing replied, "But those working in Disney's animation department appear not to be jumping ship, clearly preferring the Disney platform."

"Now, he's suddenly turned his attention to Marvel," Redstone squinted, a thought forming. "Sherry, let's propose a bold hypothesis..."

Lansing glanced curiously at the elder beside her.

Redstone hesitated briefly before continuing, "What if that kid still doesn't care about Disney's animation division? What do you think he'll do next?"

"That's a highly unlikely hypothesis. No one in Hollywood would dismiss an animation division that can produce films generating $1 billion in profits," Lansing instinctively retorted, then added, "If that were the case, Firefly would likely abandon transforming Disney's animation division and cut the division altogether."

Redstone's narrowed eyes opened wide, "Sherry, contact the group's finance department immediately. I need to know how much cash flow Viacom has available right now."

In an instant, Lansing realized Redstone's intent. If that improbable hypothesis turned true, no matter the reasons behind Firefly's decision to eliminate the Disney animation division, Viacom would have sufficient grounds to pursue it at all costs. A mature animation department would greatly enhance Viacom's merchandising plans, far exceeding any potential value from Marvel, which had yet to demonstrate any promise.

*****

https://www.patreon.com/Sayonara816.