Chapter 7: 'Four elephants'.
In 1990, the government had sold Telecom to two US telecom giants, Ameritech of Chicago and Bell Atlantic of Philadelphia, and to the New Zealand firms Freightways (owned by [Alan] Gibbs and [Trevor] Farmer) and Fay, Richwhite (the investment bank owned by businessmen Michael Fay and David Richwhite) for $4.25 billion. Freightways and Fay, Richwhite had brokered the deal and Gibbs, who was on Telecom’s board, chaired the board committee that ran the company. Through this, Gibbs had come to know the Americans well and was used to dealing with them. He offered to talk to them about whether they might be interested in Sky. It turned out that they might.
American telephone and TV companies were both looking closely at mobile technology, not yet sure where it would go but intuitively aware it would be a significant part of their futures. But in the US there was a strict demarcation line between the media and telecommunications industries. Telephone companies were prohibited from joint ventures with media companies. New Zealand had no such rule. It seemed that New Zealand, and Sky in particular, presented the opportunity for experimentation. With a joint ownership in Sky, US media and telecom companies could discuss and possibly try out things together that they could not discuss or try out in their home territory. Their curiosity was piqued. Whether it worked or whether it did not, for those with an interest the opportunity to be a close spectator was alluring.
Gibbs and Heatley brought together representatives of the two biggest American media companies of the time, Time Warner of New York and Tele-Communications (TCI) of Denver, with two of the US’s biggest telecoms companies, Bell Atlantic and Ameritech, and began negotiating with them to buy into Sky. Initially, Gibbs and Heatley suggested they acquire 40 per cent of Sky, but the Americans were adamant it would be 51 per cent or nothing.
The negotiations were laborious—not aided by the different time zones and the physical distance between the two sides nor because, in reality, Sky was dealing with four different potential partners. Sky wanted the negotiations in New Zealand; the Americans wanted them in the US. The compromise was Hawaii and, in particular, the Halekulani Hotel in Honolulu. In the end, the four-way American investment in Sky became known as the HKP or HK Partnership, named after the hotel where so many weeks were spent.
On Sky’s side, Heatley led the negotiations with lawyer Roger Craddock, and on the HKP side there seemed to be a small army. When things were tough, Heatley and Craddock would call in Gibbs to play the bad cop to Heatley’s good cop. ‘The two telecom companies plus the two TV companies would come to Hawaii with 12 people each, which is ridiculous,’ Gibbs recalls. ‘They would come with 50 people.’
The negotiations ground on for weeks, partly because while in principle the HK Partnership was buying half of Sky, in reality it was four different companies buying 12.75 per cent each. Given the size of the respective four companies, it was a small investment for each of them, but in the unusual circumstances it was hard to get everyone in agreement.
‘Jesus, they were not quick at making decisions,’ Heatley recalls. ‘Alan would fly in, beat them up and say he had them sorted, then he’d fly home and they would turn out not to be sorted at all, so I’d ring him and say, “Alan, I need you to come back and beat them up again.”’
Gradually a figure of NZ$108 million, with a raft of conditions, was reached. They shook hands on it. It was a phenomenal deal for Sky. To have even had the four companies sit around the same table, let alone agree on a figure that was well above the New Zealanders’ expectations, was far more than Heatley had dared hope for. Gibbs’s bullishness, Heatley’s salesmanship and Craddock’s legal skills had combined to pull off a coup. Now, everyone’s shares would become more valuable and, while most of the HKP price would be distributed among the existing shareholders, there would be $25 million in new capital for Sky, which would help strengthen the company’s balance sheet. Anxious to get the deal done and desperate to stop Sky’s bleeding, Heatley would have conceded a lower sale price but Gibbs had been resolute. ‘They’ll pay it,’ he promised.
Everyone flew home. A few days later a letter arrived from the Americans’ New Zealand lawyer, Derek Johnston. The Americans had reconsidered. They were now offering about $80 million instead of $108 million. Gibbs was not having a bar of the revised offer. He immediately summoned Craddock and Heatley, and dictated a response: ‘Dear Derek, We acknowledge receipt of your letter received earlier today. The offer which you conveyed is of no interest whatsoever to our clients. Yours faithfully, Roger Craddock.’
‘No, Alan! Shit!’ Heatley pleaded. ‘I’ve spent months on this. Our future depends on it. You’re playing Russian roulette! Eighty million dollars is still a lot of money. We can’t afford to lose this. We can do them a more favourable deal.’ Heatley was wretched. It was not simply the $108 million. What if this was the end of the deal altogether? It was a complicated partnership and there was nothing to stop the Americans walking away. The letter Gibbs had dictated had not even made a counter-offer. Heatley would have been prepared to take $80 million to get the deal done. Naturally, $108 million would be better than $80 million, but $80 million was better than no deal at all. No deal now was unthinkable.
Gibbs was cool. He knew how much this meant to Heatley, but Gibbs also knew the Americans. ‘No,’ he told Heatley, ‘I know these pricks. I bet they’ll be back by breakfast. This is the way they negotiate. It’s all they know.’ The letter was sent by fax. Heatley waited, more anxious than he had ever been. If it was all over, where would they look for new investors? He did not have long to wait. The Americans replied. Gibbs had been right. The deal was on again, for $108 million. Heatley’s relief was palpable.
‘It’s standard negotiating practice,’ says Gibbs calmly, thinking back on the episode. ‘You come to a deal, do due diligence and then say to the customer, “Oh, hell, I didn’t know that the debtors were running three days late and that the ink was low in the inkwells and there were a couple of other things that were a bit nasty actually, mate, so I don’t think I’m prepared to offer that much now, let’s call it $80 million,” type of thing. I’ve been through that enough times to know that it’s just a game. But Craig wasn’t in a position to put more money in. He may even have borrowed against what he had. I haven’t a clue, but I did know that he wasn’t in any position to go very far without getting this deal. We had play money in there, but he had all his capital.’
Heatley had not borrowed and not all his capital was involved. However, he could not have lasted much longer financially. Now he could breathe again. The deal raised no concerns with regulatory authorities and, finally, it was signed in May 1991. ‘It was an outstanding deal,’ says Bryden. ‘It was a quite extraordinary achievement to get these four big American companies who had never before worked together to join a partnership to invest in New Zealand. Between the two of them, what Alan and Craig achieved was outstanding.’
The deal was a singular achievement, but now the new shareholders, rivals in their home markets, needed to work cooperatively as the single majority shareholder. It was not easy on paper and it was even more difficult in practice. It is hard to better Heatley’s own description: ‘It was four elephants trying to mate and it wasn’t pretty. I don’t think anyone could control them.’
As part of the deal, Heatley resigned as chairman in August 1991. However, unusually for a director, and perhaps ominously for the incoming management team, he maintained an office at Sky. The new CEO was Nate Smith, who came from Time Warner, and the new chief operating officer was John Fellet from TCI. Those two companies had their own rivalries but at last Sky would have management who had experience in pay TV, albeit from a cable background rather than a terrestrial service. The company was now on a far more solid financial footing.
The new chairman, Barrie Downey, says that by the time the Americans came on board Sky had earned a dreadful reputation for not paying its bills on time. ‘Paul Smart was a hard-working and honest guy and I don’t know how he kept up with the demands that were made. People would go to him directly to try to get their bills paid.’ Now, with shareholders with deeper pockets whose involvement also brought a new international credibility to Sky and, importantly, comfort to Sky’s banking syndicate, the New Zealand shareholders felt more confident than they had at any time since Sky started.
John Fellet’s background was in turning around troubled pay TV companies so Sky was just another job. He had never previously stayed anywhere longer than 18 months. But while he was used to difficult workplaces, the TV culture in New Zealand was unlike any he had previously encountered and he discovered that as soon as he landed in Auckland.
On arrival, he went out with a letting agent to look for a house to rent for his family. One of the places he looked at was a villa near Eden Park. It was tucked in a cul-de-sac and while there he discovered the neighbours had children of a similar age to his own. It seemed perfect. The landlord was on site, told Fellet the rent and Fellet agreed to it. The landlord said he would need to check Fellet’s credit record. ‘No problem,’ Fellet said. He took home the rental agreement, filled it out and returned it to the agent on Monday morning. On the Thursday, the agent rang to say he had new properties for Fellet to look at.
‘No, don’t you remember,’ Fellet reminded him, ‘we chose that house near Eden Park?’
The agent hesitated then told Fellet the landlord had rejected him. Fellet was surprised. He offered to have his credit record sent to New Zealand if that would help.
‘John, I had to tell him that you work for Sky TV and he thinks pay TV is a hoax,’ the agent explained. ‘He doesn’t think it will last another 12 months. He thinks we get the best television in the world already and it’s all free and no one will ever pay for it.’ Fellet was astonished. One of the first people he had met outside his new workplace did not believe that Sky would last another year. He found a different house to rent.
He was also surprised to turn on the television his first weekend in Auckland and see the Sunday night offering. Internationally, Sunday evenings are the most competitive television because audiences are larger. People are often home, they have work or school the next day and there is less drinking and socialising. Knowing all that, Fellet was astonished to see that TVNZ’s Sunday evening prime-time show was the Tux Wonder Dogs sheep trials. No one, he claims, loves dogs more than he does, but Tux Wonder Dogs for prime-time viewing—surely Sky could trump that?
In the suburbs, he would see lines of people stretched outside video stores on Saturday nights. ‘It was a licence to print money all because, I felt, there were inadequate options on television, so I knew we were on to a winner but it took far more time to come right than I ever anticipated.’
In the end, Sky would not turn a profit for years. By then, the company that Heatley and [Terry] Jarvis had once estimated would become profitable after a $5 million investment had cost its shareholders more than $230 million. But by then it was also an enormously successful public company that had well rewarded the tenacity of its early shareholders and had changed the face of television in New Zealand.
Extracted from No Limits: How Craig Heatley became a top New Zealand entrepreneur by Joanne Black. RRP$36.99. Published by Allen & Unwin. Out now.
