Spelling Entertainment Group, Inc.

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Spelling Entertainment Group, Inc.

5700 Wilshire Boulevard
Los Angeles, California 90036-3659
U.S.A.
(213) 965-5700

Public Company
Incorporated: 1959 as Pearce-Uible Co.
Employees: 700
Sales: $599.84 million
Stock Exchanges: New York Pacific
SICs: 7812 Motion Picture & Video Production; 7829
Motion Picture Distribution Service; 7822 Motion Picture
& Tape Distribution

The Spelling Entertainment Group, Inc., is a major producer and distributor of multimedia entertainment. The company and its subsidiaries produce network television for domestic and international distribution, create and market interactive computer games, distribute feature films on video, and license related merchandise.

Spelling’s history can be traced through its two predecessors, the Charter Co. and Spelling Entertainment Inc. In 1991 Charter acquired a controlling interest in Spelling, by which time both companies were controlled by American Financial Corp. Under the direction of namesake Aaron Spelling, Spelling Entertainment Inc. had produced some of the most popular television programs of the 1970s and 1980s. Charter’s odyssey had taken it from a foundation in real estate, through a phase in the 1960s and 1970s as a multi-billion-dollar conglomerate, to a 1980s bankruptcy denouement.

Charter’s phenomenal growth and ultimate demise have been credited to Raymond K. Mason, who guided the company from the early 1960s through the mid-1980s. After graduating from the University of North Carolina in 1949, Mason returned to his hometown, Jacksonville, to begin working at his father’s real estate, lumber, and insurance business. Founded in 1919, the Mason Lumber Company had branched out into residential construction in the 1930s and early 1940s and was generating about $100 million in annual sales when the younger Mason came on the scene.

In 1963, Guy Botts of the Charter Mortgage and Investment Co. approached Mason with a merger proposal. Charter had originally been incorporated in 1959 as Pearce-Uible Co., a merger of 14 real estate businesses in Florida. This firm, which expanded into mortgage banking with the subsequent acquisitions of Commander Mortgage Company and Kirbo Mills McAlpine, was rechristened Charter Mortgage and Investment Co. in 1962. Charter and Mason merged in 1963. Guy Botts left the company to accept the chairmanship of Barnett Banks, Inc., and went on to guide that institution’s growth into Florida’s largest bank. Raymond Mason assumed the chairmanship of the merged firm, which was renamed simply The Charter Co. Over the ensuing two decades, Mason assembled a multi-billion-dollar aggregation of oil, insurance, and communications companies. The core mortgage operation would become the southeast United States’ largest mortgage company.

Charter made its first foray into the oil industry with a 1968 acquisition of 60 gasoline stations. Two years later, Mason extended his reach “upstream” in the petroleum business with the purchase of $70 million in oil refineries, gas stations, and overseas shipping operations from Signal Oil & Gas Co. From 1971 to 1973, Charter acquired four other refineries and petroleum properties, largely through exchanges of stock. The ballooning conglomerate’s assets increased by 1184 percent from 1969 to 1974, when annual sales crossed the $1 billion mark.

Charter developed a communications dynasty with the acquisitions of Downe Communications, Inc., Redbook Publishing Co., McCall Printing Co., and American Home Publishing Co., Inc. The company also owned six radio stations. By the end of the decade, Charter published such well-known magazines as Ladies Home Journal, Redbook, American Home, and Sport.

Late in the decade, Charter supplemented its insurance interests with the acquisitions of Louisiana & Southern Life Insurance Co. and two Crum and Forster subsidiaries. The insurance business, although less profitable than the petroleum operations, was a more consistent moneymaker. It helped to even out the dramatic fluctuations of the oil business.

In the mid-1970s, when real estate values dropped, the magazines slumped, and Charter’s oil properties in Venezuela were nationalized, the company’s profits slid 86 percent. Mason managed to resurrect Charter through a combination of financial savvy and plain old luck. He sold some assets and reorganized the remainder, but, according to John Craddock of Florida Trend, Charter was “saved by the Arab oil embargo that made oil precious and refineries highly profitable.” In the late 1970s, Charter’s stock rose from $6 to $50 per share.

Charter sold its oil-producing properties to focus on oil refining in the late 1970s and got out of the slumping real estate market. In 1978, Charter acquired Riffe Petroleum Co., a producer of asphalt. A year later, Charter took a $500 million half-interest in a 500,000-barrel-per-day Bahamian refinery and bought out the troubled Carey Energy Corp., a bargain at $30 million in cash and stock. The purchases catapulted Charter into the ranks of America’s top 20 oil companies, increased its sales from $2 billion in 1978 to $4.9 billion in 1979, and contributed to earnings growth from $23 million to $365 million. Charter was dubbed “a geyser of profits,” and Mason was praised as “a flamboyant president who often made surprising moves.” Earnings had “routinely quintupled” every five years from 1963 to 1983, by which time Charter had 183 subsidiaries and ranked among Fortune’s top 100 American companies.

Emboldened by the heady cash flow, Mason aimed ever higher, planning multi-billion dollar oil and life insurance acquisitions for the early 1980s. His scheme began to crumble however, when recession hampered both the publishing and petroleum legs of his tripod. Early in 1980, Charter acquired the struggling Philadelphia Bulletin for an estimated $35 million. The 132-year-old Bulletin had once been America’s largest afternoon daily, but had begun to lose subscribers and advertisers in the last half of the 1970s. Charter was unable to turn the paper around; it came up $21.5 million short in 1981 and was losing almost $3 million each month when Charter, unable to sell it, shut it down in 1982. At the same time, Charter’s Ladies’ Home Journal was suffering similar ailments: from 1976 to 1980, its subscriber rolls declined from 6 million to 5.5 million, and it lost 17 percent of its advertising pages in the first six months of 1981 alone. Charter got out of the media business with the 1982 divestment of Ladies’ Home Journal for $13 million in stock and Redbook for about $25 million in cash and notes.

Charter’s petroleum refining business struggled through scandal and a cyclical downturn in the early 1980s. The conglomerate’s oil returns were squeezed between the high price of crude oil (having sold its oil-producing properties, Charter had to buy crude on the open market) and the low prices its refined products were commanding. Charter’s corporate ethics came under fire in 1979, when President Jimmy Carter’s brother, Billy, offered to act as a liaison between the company and Libya in an effort to increase the crude supplies flowing to Charter. A company official accepted the offer, which promised “commissions” of $.5 to $.55 per barrel to Billy Carter. Although the deal never actually brought Charter a new supply of crude, it did bruise the company’s reputation at a time when it could ill afford the disgrace.

In the midst of all these other problems, another scandal came to light: Charter subsidiary Independent Petrochemical’s was accused of participating in the 1971 disposal of dioxin at Times Beach, Missouri. The site came to be known as the worst case of ground contamination since Love Canal. Charter set aside a $23 million reserve to cover the incident, which was finally settled in 1986.

The third leg of Charter’s business, insurance, took a hit in 1983. Mid-year, insurance rater A.M. Best lowered its estimation of one of Charter’s most lucrative products, its single-premium (tax) deferred annuities (SPDAs). During the first four years that Charter Security Life offered the products, its assets multiplied from $247 million to over $4.5 billion, and revenues skyrocketed from $20 million to $2 billion as Charter became the country’s largest offerer of SPDAs. Analysts began to question the viability of the product when the second-ranking company took a nose-dive in 1982. In reaction to the rating, three of the brokerages that had been selling these insurance products— Dean Witter Reynolds Inc., Merril Lynch & Co., and Prudential-Bache Securities—stopped offering them. Late in 1983, Charter Security Life’s quarterly revenues halved and the subsidiary experienced a $3.9 million quarterly deficit.

Although Charter’s overall revenues increased from $4.2 billion in 1979 to $4.97 million in 1981, its net income slid from $365.33 million to $7.12 million. Charter’s short-term debt multiplied from $29 million in 1982 to $150 million in September 1983, by which time its long-term debt stood at $400 million.

The company’s downward spiral was prodded along by a flurry of negative publicity. Mason’s reputation as an executive fell as quickly as Charter’s bottom line. John Craddock of Florida Trend characterized him as an “incredible business genius” with “a monumental indifference to the day-to-day business of his companies.” When the four top executives in charge of the nuts-and-bolts managing were killed in a tragic 1982 helicopter crash, Charter was left virtually rudderless. In fact, when Charter and 43 of its subsidiaries were forced by creditors into bankruptcy in April 1984, one of Mason’s colleagues said that he was “the most surprised man on earth.” That same year, The Gallagher Report (a weekly management newsletter) named Mason “one of America’s ten worst corporate chairmen.” In order to appease his detractors and Charter’s creditors, Mason resigned the conglomerate’s presidency and chief executive office before the end of 1984.

Financier Carl Lindner—who may have seen the writing on the wall before Mason—positioned himself as one of Charter’s top creditors by trading his Charter stock (owned through the Cincinnati-based American Financial Corp.) for loans totaling $40 million right before the April 1984 bankruptcy. His status as a leading creditor made him a powerful participant in Charter’s mid-1980s reorganization. His plan to get the floundering company out of bankruptcy offered to nullify Charter’s financial obligations to him in exchange for a 41 percent stake in the company. Lindner chipped in another $146 million cash and loans to help pay off the $452 million Charter still owed to its other creditors.

In the meantime, the liquidations that had begun in the early 1980s gathered momentum as banks, shareholders, and other creditors clamored for their money. Charter sold its insurance division to Metropolitan Life Insurance Co. for $52 million late in 1982. The company’s Northeast Petroleum Industries subsidiary, which had been acquired in February 1983 for $123.6 million, was sold to Cargill Inc. in 1986 for about $96 million. Charter also divested its New England retail fuel oil operations and its Houston oil refinery.

By 1987, Charter’s annual revenues had shrunk to about $1.5 billion from a high of over $5 billion as the company scaled back, becoming an operator of over 400 convenience stores and more than 200 gas stations. Lindner moved Charter’s headquarters to Cincinnati in 1988 after accumulating 53 percent of the company’s stock and bringing it out of Chapter 11.

Charter acquired an 82 percent interest in Spelling Entertainment Inc. for $189.5 million in cash and notes in 1991. That stake had previously been held by another Carl Lindner business, Great American Communications.

A production company primarily focused on television, Spelling had been created in the 1960s by corporate namesake Aaron Spelling. Although Spelling was often derided as a “king of schlock” whose programs appealed to “television’s lowest common denominator,” there was no denying his commercial success. His multidecade string of hits included “Mod Squad,” ”Charlie’s Angels,” “The Love Boat,” “Fantasy Island,” and “Dynasty.” His 1970s-era programs propelled the American Broadcasting Corporation to the top of the television ratings charts.

But by the late 1980s, Spelling appeared to have lost his “Midas Touch.” Annual revenues were on the decline as the company had just one show on broadcast television and two others in production. Aaron Spelling Productions Inc. stock declined from its initial issue price of $14 in 1986 to $5 in 1988 as sales and earnings declined by double-digit percentages.

Spelling foreshadowed the merger with Charter in a 1988 interview with Mark Frankel of California Business. Spelling said that independent production companies such as his would “have to branch out and do other things besides just producing for television—become miniconglomerates—in order to make sure that we can keep doing what we do.” He also targeted the foreign syndication market as an avenue for growth, acquiring Worldvision Enterprises Inc., a global distribution company, in 1989.

Charter completed its acquisition of Spelling with a mid-1992 exchange of stock valued at $44 million and raised money with the subsequent spin off the remaining oil business to its top managers. Renamed Spelling Entertainment Group, the merged companies continued to hold on to a few Charter assets through the mid-1990s.

Less than a year passed before Spelling Entertainment Group’s corporate ownership structure changed again. In 1993, Lindner sold his controlling (53.4 percent) interest to Blockbuster Entertainment Corporation for $141.5 million. By the end of 1994, Viacom Inc. had bought Blockbuster and announced its intention to sell Blockbuster’s stake in Spelling to help settle its own debts.

Spelling acquired Republic Pictures Entertainment and merged it with its Worldvision subsidiary in mid-1994, creating a library of 7,000 feature films, made-for-TV movies and mini-series, and 15,000 episodes of Spelling-produced television. Global syndication of these programs proved a steady source of revenue that fueled new production efforts.

Spelling’s television production business rebounded in a big way in the early 1990s. “Beverly Hills 90210,” a prime-time teen soap that featured Aaron Spelling’s daughter, Tori, was the first of a string of early 1990s television hits that included spinoffs “Melrose Place” and “Models, Inc.” These series became a mainstay of Rupert Murdoch’s burgeoning Fox network.

Pursuant to that transaction, Spelling Entertainment acquired Virgin Interactive Entertainment plc from its parent. This producer of interactive games like “The 7th Guest” and “The Lion King” provided Spelling with another avenue for diversification in its growing array of businesses.

Spelling Entertainment fulfilled Aaron Spelling’s vision of diversification in the early 1990s. From its core in television production, Spelling expanded into large-scale domestic and international distribution of television, film and video material, interactive games, and licensing and merchandising. By the end of 1994, Spelling’s domestic television production and distribution contributed less than 25 percent of annual revenues. The diversification strategy appeared to pay off in increased annual sales and net income. Revenue nearly quintupled, from $122.75 million in 1991 to $599.84 million in 1994, and net income almost doubled (albeit erratically) from $12.96 million to $24.11 million.