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This Family Was Really Messed Up

Michael Eisner saw a gem when Disney paid $5 billion for a kids cable channel. But nothing was as it seemed.

June 15, 2004|Meg James and Sallie Hofmeister | Times Staff Writers

The scent of money was in the mountain air.

Walt Disney Co. Chief Executive Michael Eisner had come to the resort town of Sun Valley, Idaho, with his company's wallet wide open -- a risky move at a gathering of voracious moguls.

The year was 2001, and Eisner was under pressure to bulk up Disney, much as his competitors had done through mergers and acquisitions. America Online was now the owner of Time Warner. Media giant Viacom had gobbled up CBS, along with some cable channels.

Everyone but Disney, it seemed, was in the hunt.

"Acquisitions are a tricky business," Eisner had cautioned shareholders a year earlier. "Companies often pay too much for other companies ... because they are afraid to let cash burn a hole in their pockets."

But Eisner thought he finally had found a plum, and he was determined to snatch it at the luxurious Sun Valley confab. The private gathering, hosted each July by investment banker Herb Allen, brings together the world's most influential media leaders for recreation, speeches and deals. It was there, six years earlier, that Eisner had earned wide acclaim with his surprise purchase of Capital Cities/ABC.

This time, the story would be different.

Eisner left the mountain summit with an ailing cable channel called Fox Family, along with some foreign assets, for which he agreed to pay $5.3 billion. The negotiations lasted less than an hour. One of the beneficiaries, News Corp. Chairman Rupert Murdoch, would later kick himself. He told associates that Eisner was so eager he might have paid a billion more.

Amid the many financial problems Disney has encountered in recent years, few have revealed more about the company's inner workings and shortcomings than the saga of the cable channel now called ABC Family.

Today, three years later, the channel is worth billions less than its purchase price.

The acquisition has suffered through a series of miscalculations and missteps, many of which may have been foreseeable, current and former Disney executives say. The financial projections were flawed from the start, they say, and the programming strategy never got off the ground.

When the former chief executive of BBC America takes over as president of ABC Family next week, he will inherit a troubled financial asset that has become a professional liability for Eisner.

Eisner's critics -- including former board members Roy E. Disney and Stanley P. Gold, who approved the deal -- have used the channel's struggles as an illustration of the kind of management that they contend led to the company's financial slide. The ex-directors said they had no way of knowing that management's projections would fall so short.

Eisner and other Disney executives today concede that they overpaid. But they say the obstacles to success had more to do with the shifting economics of television than with any failures of management.

During a recent session with media analysts in New York, Eisner assured them that the channel's fortunes were turning, with ratings and revenue on the rise. Viewership jumped 18% this year, bringing in the biggest audiences since Fox's ownership.

"The Family Channel," he told the assembled skeptics, "is the definition of a dog in the minds of everyone in this room, which is turning into a show dog."

Others aren't so sure. They think it may take years, if ever, for Eisner's canine Cinderella story to find a happy ending.

A Plan to Revolutionize TV Broadcasting

Murdoch and his partner, TV mogul Haim Saban, needed someone with deep pockets to bail them out.

They had paid nearly $2 billion in 1997 for a cable channel in the competitive world of children's television. At the time, Murdoch's Fox TV network was losing ground to cable outlets such as Nickelodeon. Saban, whose television library included the "Mighty Morphin Power Rangers," feared being shut out by channel owners that were increasingly airing shows that they produced or financed.

But within three years -- after management changes and failed programming strategies -- Fox Family Channel was struggling. The two men sent word to Wall Street that they were ready to sell.

Before the first private jet touched down in Sun Valley, Eisner hoped he'd be leaving with a new trophy. He'd been discussing the possible purchase with his most trusted lieutenants for months. When the parties secretly met at the retreat, it became clear that these would be no ordinary negotiations.

Eisner stunned the sellers by promptly asking them to name a price that would shut out potential competitors, sources familiar with the meeting said. Smelling desperation, Murdoch and Saban said they wanted $5.5 billion, far above the approximately $3-billion value Murdoch's own bankers had privately placed on the asset.

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