Rupert's killer of a deal

On a cold, damp December evening in 1997, as the rest of the Canadian seaport city of Vancouver rushed to finish its Christmas shopping, eight of the world's most powerful media executives and movie moguls sat down to sign a deal that would destroy Australia's first pay TV network across the Pacific in Sydney.

Lachlan Murdoch, son of News Corp chief Rupert Murdoch and then head of his Australian operations was there, leading a team of lawyers and executives of his Foxtel cable TV operation, along with the top brass of four of Hollywood's read the world's greatest movie studios, Columbia TriStar, MCA/Universal, 20th Century Fox and Paramount.

The deal they were to sign obliged all parties to do everything ``practical and lawful" they could to terminate the agreement the studios had signed to provide the fledgling Australian pay-TV operator Galaxy with its life-blood the hundreds of movies and other programs it needed to broadcast three channels 24 hours a day seven days a week.

Instead, rights to the Showtime, Encore and TV1 channels the mainstay of Galaxy's programming would be transferred ``as soon as possible" by the studios to Galaxy's biggest competitor, Foxtel, which was then owned 50/50 by News Corp and Telstra.

The accord thrashed out in Vancouver was, according to a claim filed in the New York Supreme Court, the climax of a ``broad-based and nefarious campaign [by News] to undermine Australis [Galaxy's owner] and destroy the vital contractual relationships that were Australis's most important assets" which had been waged almost from the moment Galaxy went on air three years earlier.

``As part of this campaign," continues the claim, ``News employed a multitude of predatory practices against Australis, some of which News has previously used to eliminate other rivals in other major media markets around the world."

Five months after the Vancouver agreements were signed, Australis collapsed into bankruptcy and the screens of its 100,000 subscribers faded to black, leaving Foxtel to establish itself as the dominant (though still haemorrhaging) force in the Australian pay-TV market. Today Showtime, Encore and TV1 are three of its more popular channels.

And the people who had sunk money into Australis investors who bought its shares when it was floated, bondholders who lent it money, and creditors were more than $1 billion out of pocket.

However, they have not forgotten nor forgiven News Corp for what they allege was its role in the demise of Australis. That action in the New York Supreme Court has been launched on behalf of US bondholders, who collectively lost almost $800 million of the total, and who are suing News for no less than $6 billion which they say is the revenue Australis would have earned if it had not lost the rights to the Hollywood movies.

The action was launched almost three years ago by the law firm Milberg Weiss Bershad Hynes & Lerach, which advertises itself on the Internet as ``the world's leading class action law firm" which is ``primarily focused on class action litigation".

The firm refused to comment on progress of the claim. News was also saying nothing, beyond that it was defending the action. In an earlier statement to a newspaper in its own stable, a company spokeswoman was quoted as dismissing the action in these words: ``They [the allegations] are utterly wild and the case is being run by a contingency fee law firm, and we regard it as a try-on."

However, Milberg Weiss has won a few preliminary legal skirmishes over jurisdiction and there are persistent rumours of settlement talks.

A spokesman for Permanent Trustee, which is the trustee in Australia for some of the bondholders, said that ``these things usually end up in a settlement of some sort".

Either way, the claim and a wad of documents obtained under legal discovery and filed with it, give a scary insight into the bare-knuckle brawl that was going on boardrooms and lawyers' offices around Australia and overseas in the mid-1990s.

Flashback to 1993. After two decades of dithering, the Federal Government finally calls tenders for Australia's first pay-TV licences which many at the time thought (to quote Kerry Packer's own father Sir Frank, who snared the first broadcast TV licence) would be a ``licence to print money".

Out of nowhere bounces a cocky, Lebanese-born entrepreneur named Albert Hadid, of whom no-one at the big end of town had ever heard, to beat both Packer and Murdoch to the first licence.

It was quickly onsold twice in controversial circumstances Hadid is said to have made $33 million on the deal before finishing up with Australis, which attracted more than $200 million-worth of capital when floated on the stockmarket with plans for a subscription satellite TV broadcaster to be called Galaxy.

First there were a couple of minor problems to solve. For a start, what were they actually going to broadcast on this new channel? Much as we would like to think otherwise, there is really only one answer to this question whether you are in Australia or Azerbaijan. Only Hollywood can provide the sheer volume needed to fill the airwaves 24 hours a day, 365 days a year, year after year.

After tortuous negotiations, Australis struck a deal with four of the ``big seven" Hollywood studios (ironically including Fox, which Murdoch himself controls) giving it the Australian pay-TV rights to their product, to be packaged into three channels old movies, even older movies, and repeats of truly ancient American sit-coms and dramas which it was thought was what Australians would want to watch.

Murdoch had by now teamed up with Telstra to launch a second channel, Foxtel. The deal involved News Corp's providing the programs and Telstra the telephone lines on which to broadcast them. Murdoch, however, now found he had a second problem.

First, Galaxy had got the jump on its competitors, going on air with its first limited sports broadcasts on January 1, 1995. But now Murdoch found that the third player, Optus which was busy stringing $4 billion worth of wires along Sydney's power poles had tied up the other three Hollywood studios, Time Warner, MGM and Walt Disney (including Miramax).

As the deadline approached for Murdoch to deliver on his deal with Telstra, he was forced to eat humble pie and go to his puny rival to beg for product to broadcast. The agreement he was forced to sign was one of the dream deals of movie history under it, Foxtel was forced to buy the content of the three channels for 25 years at a cost estimated by the bondholders in the current action at $US3.5 billion ($6 billion).

For struggling, under-capitalised Australis, it would deliver the hundreds of millions of dollars it needed to build its satellite and microwave broadcast network, making the company profitable by 2001.

Australia would have a new major media player.

For Murdoch, the deal was a disaster. He had to carry the multi-billion dollar contingent liability on his books, dragging down the credit-worthiness of his entire empire.

He is said to have told another executive around this time that one of his two major goals in life was to eliminate this liability from his books.

According to the claim filed in New York, Murdoch first tried to buy Australis out of the contract for a piffling $US220 million, then resorted to a campaign to try to destroy Australis as a competitor, and abort the $6 billion deal which he planned to renegotiate on vastly more favourable terms directly with the studios. Win-win.

Beginning in 1996, as Australis sought to tap the US junk-bond market for the capital it needed to build its business, News Corp contacted financiers, advisers and prospective investors, giving them ``misleading and disparaging information" in an attempt to scuttle the fund raising, say the bondholders.

When this failed the money was raised, though Australis was forced to offer an excruciating 16 per cent return to get it.

The claim says that a financial report was leaked to the News Corp paper The Australian, which published a damaging article predicting that Australis would be losing money right through until 2009.

The claim cites two out of four cases in which News Corp's tactics ``poisoned the environment" for bond raising.

In the first, Merrill Lynch one of Australis's largest bondholders which had said it would support an additional raising of $400 million in bonds and equity, pulled out and made only a token investment, after being made the sole manager of a $US1 billion offering of News Corp securities.

In the second, another major bondholder, Oppenheimer, cancelled an order for bonds worth $US12 million. There was a ``rumour" this happened after News bought its existing bondholding at a premium above the market price.

As Australis struggled to stay afloat under this relentless assault, it was forced to seek a merger with News Corp. News was given access to its books to do due diligence, but after the Australian Competition and Consumer Commission vetoed the deal, the claim says a list of Galaxy subscribers apparently fell into the hands of its competitor, Foxtel, whose salespeople began making calls to try and persuade people to switch to their network.

News repeatedly went to the courts to battle Australis's increasingly desperate attempts to stay afloat. An alliance with Optus Vision fell apart after Murdoch challenged it in the Federal Court. In December 1997, when Australis announced it had won an 11th hour reprieve with permission from its bondholders to raise another $US27 million, Murdoch took the bondholders (led by State Street Bank) to court to try to have this declared invalid.

The situation was not helped when, about this time, Australis's chief executive, Sean O'Halloran, was sacked and called the most memorable press conference in Australian corporate history at which he denied that he was mad, had had a nervous breakdown or was addicted to cocaine or heroin - he had undergone a drug test, he said, which showed that he was clean. Furthermore, he had not spent $140,000 on his corporate credit card at Gucci in New York.

This, then, was the background to that secret meeting in Vancouver. Why Vancouver is a matter of conjecture.

The result, however, was as swift as it was brutal. The studio consortium passed a resolution on December 23, 1997, declaring Galaxy insolvent and terminating the lucrative agreement to provide it with movies effective July 31, 1998.

This, naturally, caused a complete collapse of confidence in the company, and in May 1998 it went off air a billion-dollar example of what happens if you play with the big boys of the Australian media.