Lasting Impact: Top Deals of 2002

Deal of the Year Dockworkers Pact

Dodgers’ Dilemma

The good news for baseball fans this year may turn out to be bad news for Dodgers fans in 2003.

Determined not to exceed the $117 million salary cap established in the 11th-hour labor agreement between owners and the player’s union last September, Dodgers owner Fox is tightening the purse strings. And because the team has much of its payroll tied up in a handful of inflated contracts, General Manager Dan Evans will be challenged to make improvements on the third-place performance in 2002.

Major offseason moves have been largely about dollars and cents. The team jettisoned veterans Eric Karros and Mark Grudzielanek to the Chicago Cubs and picked up first baseman Fred McGriff at the relative bargain rate of $3.75 million. But fans would be smart not to count on any other big signings.

Even with big financial losses in 2001 and 2002, no one could accuse the team of penny-pinching. That appears to be changing.

Buying Budget Time

Looking back now, it almost seems tame. California Gov. Gray Davis and state legislators put together a $98.9 billion budget in September after months of fighting, hand-wringing and blame-placing in what was a disastrous year for government.

The budget covered what was then a $23.6 billion shortfall by practicing sleight of hand through, among other things, securitization of future settlements with tobacco companies and the suspension of business’ net operating loss deductions for 2002 and 2003. It put off hard decisions about budget cuts or increasing taxes, which the procrastinators in Sacramento must now face with the budget deficit having swelled to $35 billion.

The governor called legislators back for a special session in December to deal with the widening deficit, but they quickly adjourned, preferring to wait until Davis makes his tax-hike recommendations in January, when they’ll finally be forced to do something, much of it likely to involve higher taxes.

Disney Board Changes

Lingering dissatisfaction with Walt Disney Co.’s boardroom practices led to several changes in corporate governance. Among them: a new standard for what constitutes independence in a director, a higher stock ownership requirement for board members, and the severing of business relationships between board members and the company.

Even so, the Securities and Exchange Commission began an inquiry into revelations that four directors had relatives working for the company. In December, Disney named former Senate Majority Leader George Mitchell to the new position of presiding director who would oversee board meetings without the presence of management members of the board.

Even Disney’s critics have praised the moves, although what impact they will have on what many consider Chairman Michael Eisner’s overreaching influence on the board remain to be seen. Disney stock has lost more than 60 percent since its peak in 2000 and was down about 20 percent for 2002.

Friendly Contract

Fans cheered, tabloid television gushed and somewhere the stars of “Frasier” were smiling.

In agreeing with Warner Bros. Studios to a one-year, $10 million-per-episode licensing fee to bring back “Friends” for a 10th season, NBC demonstrated the lengths to which networks will go to keep eyeballs peeled to their screen.

Though the long-running sitcom commands hundreds of thousands of dollars for a 30-second spot, NBC has little hope of making a profit next season. But the show’s popularity with young adults, its importance as a promotional launching pad for new series, and its anchor position in the network’s vaunted Thursday night lineup led NBC Entertainment President Jeff Zucker to pull out all the stops including signing off on an abbreviated 18-episode schedule.

The six stars will make do in 2003 with the same $1 million per episode they got last year, while Warner Bros. will cover its production costs something it was not able to do last year because of the high salaries. “Friends” will almost certainly be gone by 2004 the year NBC’s contract with Paramount for “Frasier” is up for renewal.

Nursing Power

Organized labor scored a huge win at L.A.’s hospital of the stars when the California Nurses Association won an election in December to organize 1,500 workers at Cedars-Sinai Medical Center.

The campaign was nasty, with the union accusing Cedars officials of intimidation and threats. Labor advocates even accused the hospital of betraying its own Jewish heritage by opposing the union.

The vote was of strategic importance for the union as it helped build momentum after an impressive string of victories throughout the state, including one at Long Beach Memorial. Certification, however, may be delayed because Cedars said it would challenge the vote. It accused the union of intimidation, property damage and “interference with the right to vote.”

Ovitz Out

You know the year didn’t go well when you’re described as a “former Hollywood power broker.” Michael Ovitz’s efforts to create a Hollywood powerhouse imploded to the point where he wound up selling his talent agency, Artist Management Group, to The Firm, the upstart agency founded by Jeff Kwatinetz (and a personality some find even more abrasive than Ovitz).

But there was more specifically, a weird interview in Vanity Fair in which Ovitz blamed Hollywood’s “gay mafia” for his recent troubles (he later apologized). He also has been sued by two former employees for alleged managerial shortcomings and by a Los Angeles woman who claims that his dogs attacked her and her dogs as they ran loose.

Ovitz’s idea was to have a talent agency that would make and distribute television shows owned by its artists. But the vision never panned out, in part because TV requires too much upfront development money and little guarantee that the networks will bite. Not helping are all the people he has managed to alienate over the years.

Under the deal to sell AMG, partners Rick Yorn and Julie Silverman-Yorn joined The Firm as well as an A-list roster that included Leonardo DiCaprio and Cameron Diaz. As for Ovitz, who reportedly has recouped some of the millions he had invested in the venture, he’s been assiduously out of sight.

Pacific’s Grove

You win some and you lose some. So it went for Los Angeles-based Pacific Theatres Corp.

The company’s much-hyped Arclight Hollywood complex at the Cinerama Dome looked like a ghost town for much of 2002 as few customers were willing to pay up to $14 for a seat, albeit a plush one. On the other hand, a 14-screen theater at The Grove has become such a hit already the highest grossing multiplex in L.A. that Pacific recently agreed to buy the complex for $30 million from developer Caruso Affiliated Holdings, developer of the popular mall.

The high price is expected to pay off for Pacific, a regional chain with about two dozen theaters, because heavy traffic provides more clout in dealing with distributors. Also not hurting is that Pacific largely avoided the overbuilding in the late 1990s that doomed other exhibitors.

Defensive Posture

Capping a decade-long, $26 billion buying spree, Northrop Grumman closed on the acquisition of TRW Inc., solidifying its place as one the No. 2 defense contractor in the nation.

The $7.8 billion deal did more than add to Northrop’s stable of government contracts, however. In bringing on TRW’s technological assets, Northrop Chief Executive Kent Kresa completed the formation of a business whose reach extends from the sea to space.

With the deal, Northrop is a major player in manned and unmanned aerospace, warships, satellites and in the growing homeland security business. Revenues in 2003 are expected to hit $25 billion three times the level of just two years ago and while debt is also up, the pre-closing sale of TRW’s automotive division unloaded $4 billion in debt, further aiding the balance sheet.

Chief Proponent

When L.A. Mayor James Hahn tapped former New York and Boston police chief William Bratton to head the ailing L.A. department, it signaled a sea change in the approach to local law enforcement.

Bratton, in office during New York’s precipitous decline in crime during the early ’90s, moved quickly to shore up a Los Angeles department riven by racial mistrust, labor-management strife and faced with a rising crime rate.

Since his appointment in October, the new chief has moved to reorganize the department, decentralizing the command structure and establishing a new Homeland Security Bureau. Though there remain doubts that the technology-backed community policing structure so successful in New York will play in a city as spread out as L.A., Bratton’s early marks have been strong.

Public Property

Rob Maguire has developed some of Los Angeles’ best-known properties, from the city’s tallest (the Library Tower) to one of its most litigious (a 455,000 square foot complex at Playa Vista).

Looking to gather up badly needed cash to refinance debt, Maguire filed with the Securities and Exchange Commission late last year for an estimated $890 million public offering for the bulk of his assets.

Besides reducing debt obligation, proceeds from the sale of shares what would be the largest real estate investment trust offering since 1997 would fund further acquisitions. But there’s no telling how the offering might go in a shaky market, and besides, there’s Maguire himself, whose personality over the years sometimes gets in the way of his dealmaking. Look for early reaction to the offering, which will be rolled out early this year.

Extended Reach

L.A.’s biggest law firm got a little bigger last year. O’Melveny & Myers merged with New York’s O’Sullivan LLP, a boutique private equity firm.

The combined firm topped 800 lawyers, making it one of the largest in the nation. The deal came on the heels of a year in which O’Melveny saw its profits rise by 34 percent on a 17 percent increase in revenues.

The mid-summer merger, touted by O’Melveny as not only boosting its private equity practice and New York presence but making it more attractive to national and international clients, was one of more than two dozen announced last year as the business of lawyering consolidated further. Also key to the merger was O’Sullivan’s profits per partner, which eclipsed $1 million in 2001. That was seen as a Holy Grail of sorts for O’Melveny, which posted $940,000 in profits per partner in the same period and had restructured in order to help reach that level.

Univision’s Ambitions

Spanish-language behemoth Univision Communications Inc. launched a new television network, TeleFutura, and then agreed to a $2 billion stock deal to acquire Dallas-based Hispanic Broadcasting Corp., which has five stations in Los Angeles among its 55 nationwide.

The still-pending deal raised the hackles of Hispanic radio competitors that have argued that HBC-investor Clear Channel Communications Inc. would increase its dominance of the Spanish-language media market. Clear Channel’s 26 percent HBC stake will convert to a 7.6 percent stake in Univision if the deal is approved.

Univision and its billionaire chairman, A. Jerrold Perenchio, might be paying too much for HBC (Univision was trading around $24.70 last week, vs. $37.70 in June when the deal was announced). But the Univision/Clear Channel partnership would create a broadcast juggernaut, including two television stations and 13 radio stations in Los Angeles. There’s also the ample cross-marketing opportunities, a prospect has led to close scrutiny by the Justice Department. As of last week, the deal was expected to clear.

Well-Endowed Schools

L.A.’s two biggest universities, never shy for donations, picked up a couple of really big ones this year.

Entertainment mogul David Geffen gave $200 million to the UCLA School of Medicine, the largest donation ever in the University of California system. Meanwhile, University of Southern California’s Annenberg School of Communication received a $100 million gift in September from the Annenberg Foundation.

Geffen’s gift, which had no strings attached, would go toward research and teaching. The Annenberg gift tripled the endowment at the school and will pay for a new center for the study of journalism and democracy.

Both donations were considered significant because they showed that with the right fund-raising campaigns, schools could still do well amid economic uncertainty and stock market declines.

IATSE’s Early Deal

Not all labor negotiations need to get dragged out. Hollywood studios and the industry’s largest below-the-line labor union, the International Alliance of Theatrical Stage Employees, reached an agreement on a new three-year deal more than seven months before the current pact was due to expire.

Although not as high profile as the Screen Actors Guild and the Writers Guild of America, IATSE has more working members in Los Angeles around 35,000 than any other union. And its members, ranging from cinematographers to make-up artists, have been hit harder by runaway production than just about anyone else.

That’s why union president Tom Short sought out the Association of Motion Picture and Television Producers for early talks. The new deal includes modest gains in health and pension benefits, two of the union’s biggest concerns. Taking a cue from IATSE, SAG has initiated early talks with the advertising industry to avoid a repeat of its six-month strike of 2000. The deal ending that strike doesn’t expire until the end of October, but both sides say they would like to reach a new pact well in advance.

Developing Downtown

Sprucing up downtown continued to be a focal point as two plans were designated redevelopment zones and both were controversial.

The L.A. City Council approved a $2.4 billion plan for the Staples Center area, promising 13,000 new housing units, jobs and social services. The so-called City Center plan quickly came under fire when opponents portrayed it as a way for billionaire Philip Anschutz to build a downtown football stadium, although the proposal did not specifically mention it and Anschutz later gave up the plan. The county sued, arguing that the area, which includes the site of a proposed hotel complex, is not blighted and that declaring it a redevelopment zone would divert tax money from county coffers. No settlement has been reached in the suit.

The council approved a second L.A. Community Redevelopment Agency plan to create a 738-acre redevelopment zone in an industrial area in eastern downtown. County officials said they were considering opposing it for the same reasons as the City Center project.

Flip Factor

The vacancy rate downtown might be hovering just under 20 percent, but that didn’t stop investors from pouring hundreds of millions of dollars into prime real estate.

In what was billed as the busiest investment year downtown in 15 years, more than 9 million square feet of office space changed hands in deals valued in excess of $1 billion.

Spurred by low interest rates, a flight from the equity markets, perceived undervalued property and the sense that downtown might actually be seeing start of its long-touted renaissance, both institutional and individual investors placed their bets on the urban core.

The activity was also a boon for the city, which saw its budget ills eased somewhat by a 10 percent spike in documentary transfer taxes.

Getting Thirsty

The year begins with new doubts about Southern California holding onto a cheap, dependable supply of water. What was touted as a historic deal by former Assembly Speaker Robert Hertzberg to transfer water from Imperial Valley farms to urban water users was scuttled in December when Imperial farmers voted against it. This resulted in the federal government cutting off California’s supply of surplus Colorado River water on Dec. 31, forcing L.A.’s Metropolitan Water District to put greater dependence on the fragile Bay Delta Region in the northern part of the state and agreements with farmers in other parts of the state who may want to sell their water. There’s still talk that the Imperial water deal will be revived as farmers are ultimately pressured against many of their wishes to help huge urban populations. There are simply too many people in the cities to ignore and over the years, much of the water used for agricultural purposes has been wasted. But expect the price to be high. Meantime, water officials say they have enough reserves to make up for the lost Colorado River water through at least 2003.

Mayoral Stature

With the defeat of the various secession movements, L.A. Mayor James Hahn led a delegation of politicos and celebrities on an Asian trade mission.

Top among those deals was the willingness of Asian shippers, which form the bulk of the traffic through the Port of L.A., to cut emissions by shutting down engines while idling outside the port. That deal was followed by an agreement with a major Hong Kong terminal to boost security by screening cargo before departure.

Hahn was joined by actor Arnold Schwarzenegger in an attempt to restart the flow of Japanese tourists to L.A. Schwarzenegger was a hit with local youths. Whether that translates into more Japanese tourists coming to see the Terminator’s adopted city is yet to be seen. Also unclear was the extent of private dealmaking that took place. Though Hahn had a coterie of business leaders with him, no deals between L.A. and Asian companies were announced.

Account Closed

Another venerable Los Angeles banking name was destined to drop out of the local vocabulary when Citibank closed on its acquisition of Golden State Bancorp.

The $5.3 billion deal for Golden State, parent of California Federal Bank, meant that the second largest savings bank in the state would disappear. Gone from the local scene are 350 branches (with $50 billion in assets); in their stead are Citibank West branches. The changeover is set to be complete by the spring.

That appears, for the moment, to be the brunt of the deal’s impact in Southern California. Up north, as many as a quarter of CalFed’s 8,800 Sacramento call center employees were destined to get the ax.

Prepared by Jason Schaff, Jonathan Diamond and Darrell Satzman