The fight over Michael's millions
The King of Pop's posthumous success has produced a gusher of money. Now, where his estate is concerned, the Michael Jackson show is just getting started.
(Fortune Magazine) -- On a recent Friday afternoon, workers toiled away at Neverland Ranch as part of a curious restoration effort that accelerated after Michael Jackson's sudden death on June 25. The main grounds of the 2,700-acre property had been cleared of encroaching chaparral and were now close to the condition they had been in when Jackson last set foot here some five years ago.
The flower beds next to the Disneyland-replica train station were pristine, though the trains were in storage and the midway amusement rides and zoo animals that once populated the property were gone. The Tudor-style mansion, guesthouse, and separate movie theater/dance studio were in move-in condition. The theater even had fresh candy at its concession stand, though the building's only inhabitant was a wayward bat stranded in the restroom.
It was a bit sad and eerie, albeit, from an MTV Cribs kind of viewpoint, quite excellent.
Through all the hoopla following Jackson's death, no one has said publicly what will become of Neverland, which Los Angeles private equity firm Colony Capital took control of after the property nearly went into foreclosure last year.
The Jackson family's desire to have Michael's body interred here proved too complicated, as has the notion of turning it into a Graceland-like destination for fans. There is talk of moving some of the property's structures, which include a giraffe barn, to Las Vegas with an eye to establishing a Neverland attraction there and selling the ranch.
Under terms of an agreement struck with Jackson after Colony purchased the note on the property for $23.5 million, when Neverland is eventually sold, Colony will recoup its investment in the note plus accrued interest, its management and upkeep expenses, and around 12% of everything above that as a success fee. The rest will go to Jackson's estate.
While he declined to confirm the details of his arrangement with Jackson, Tom Barrack, the CEO of Colony, says the Neverland property ought to be worth $60 million to $70 million.
If so, that would be just one source of a sudden gusher of money into Jackson's estate, the bulk of which he left to his mother and three young children.
Two years ago Jackson was headed for insolvency, a consequence of having barely worked in nearly a decade, a period during which he fought child molestation charges and became better known for his eccentricities than for his musical skills. The deal with Colony, and Jackson's decision to stage a series of comeback concerts, were his way out from under debts that had grown from $90 million a decade ago to around $435 million today.
Though Jackson made some savvy investments early in his career, his loans piled up through an astonishing combination of careless financial decisions -- made with an oft-changing and colorful parade of business advisers -- a mountain of legal bills and distractions, and uncontrollable spending.
"When it came to money, he was almost a contradiction," says Randy Phillips, who runs the company that planned to stage Jackson's comeback. "He didn't care about money but liked to spend money and knew that he had to make money."
His demise might have been a tragic postscript to a faded career. Instead, the singer is having a posthumous comeback that promises to dwarf that of Elvis Presley (whose daughter Jackson was once married to). This year Jackson's estate stands to bring in close to $200 million from music sales, merchandising, and book deals; an exhibition of memorabilia; and especially a hastily made documentary based on his comeback concert rehearsals that hits theaters Oct. 28.
The film, "This Is It," is tracking to be a box office success -- with more tickets presold than the next "Twilight" installment -- and riches from DVD sales could follow. Jackson has sold some 5 million albums and 10 million downloads since his death in the U.S. alone, according to Soundscan, and plans are in the works for at least two albums of unreleased songs. (To put that in perspective, he had sold just under 300,000 records in the half-year before his death.)
In all, Jackson's estate would likely be worth $100 million or more if it were liquidated today, but properly managed, it ought to be worth multiples more in time.
The story of Michael's millions -- reconstructed here from private documents, court files, and dozens of interviews with people who worked with the singer -- is as off-the-wall as he was. Barrack recalls being charmed by the self-proclaimed King of Pop when he first met him last year but deeply skeptical about doing business with him.
"Everybody said two things about him," Barrack says. "Firstly, if Michael Jackson came back it would be the greatest thing in music history. And secondly, it would never happen." Improbably, both have come true.
A brief recounting of tragic and familiar facts: Jackson died suddenly in Los Angeles at age 50 amid final rehearsals for what was expected to be a 50-date gig at London's O2 arena. The cause was a combination of prescription drugs, including a surgical anesthetic, propofol, that Jackson was reportedly being given to treat insomnia. The death is being treated as a homicide, and an investigation continues.
As demand for the London shows demonstrated -- all 800,000 tickets sold out within five hours -- Jackson, despite his tabloid travails, was still a megastar. From child stardom with his brothers in the group the Jackson 5, the Gary, Ind., native skyrocketed as a solo act in the 1980s. His album "Thriller" has sold more than 70 million copies, and he is the biggest-selling recording artist of all time.
Between "Thriller," its very successful follow-up, "Bad," and a 120-date stadium tour and sponsorship deals, Jackson earned as much as $350 million, estimates his manager during that period, Frank DiLeo. Paul McCartney, with whom Jackson recorded the single "Say Say Say," turned him on to the idea of buying music publishing rights, reportedly saying, "This is the way to make big money."
Jackson began buying some publishing catalogues with his earnings, including those of Sly and the Family Stone. But McCartney ended up miffed when, in 1985, Jackson -- with the help of his then-lawyer, John Branca -- paid $47.5 million for ATV Music Publishing, a catalogue that included more than 250 Beatles songs. (It was around this time that Jackson also bought Neverland, for $17 million in cash, after visiting McCartney, who happened to be renting it during a video shoot for "Say Say Say.")
Separately, Jackson set up a company called MiJac to hold the publishing rights for what would eventually be eight studio albums of his own music, plus the other catalogues he owned pre-ATV.
In the 1990s, Jackson's ambitions grew ever larger, but his meteor started to sputter. He faced accusations of child molestation and settled a civil suit for $15 million. He burned through piles of money on movies and other ventures that didn't pan out. In 1995 he merged ATV with a publishing business owned by his recording label, Sony (SNE), in a deal that valued ATV at far more than what Jackson had paid -- $115 million plus half the combined company.
Jackson wanted to transcend being a music performer by making films and theme park attractions and videogames. His short video, "Captain EO," directed by Francis Ford Coppola, was shown in 3-D at Disney theme parks. But the only feature movie project he ever completed, called "Moonwalker," failed to find a U.S. distributor when it was released.
By the late 1990s, according to court filings, Jackson had borrowed $90 million from NationsBank, collateralized by his half-interest in what was now called Sony/ ATV. Myung-Ho Lee, a Korean businessman who for a time was Jackson's business manager, claimed in a lawsuit that he lined up "desperately needed financing" from Bank of America (BAC, Fortune 500) (which had merged with NationsBank) to refinance that loan and borrow more -- increasing Jackson's debts to $220 million.
Some of that new money was pumped into dotcom ventures, including Tickets.com, a gaming company, and a fuel-cell business. In court papers Lee also claimed he was not paid for his services and accused Jackson of "bizarre and extravagant" behavior. (Jackson claimed in response that it was Lee who had defrauded him.) "Michael Jackson was -- and is -- a ticking financial time bomb waiting to explode at any moment," Lee said in his complaint.
The case was settled not long after Jackson's last studio album, "Invincible," was released, in 2001. Compared with his past chart busters, "Invincible" had lackluster sales, and Jackson was unhappy.
Bob Daly, who ran Warner Music (WMG) for years and later the Warner Bros. studio, knew Jackson through his wife, the songwriter Carol Bayer Sager, to whom Jackson had dedicated the album. One day Jackson asked Daly, as a favor, to investigate whether Sony had cheated him in the making of the album. Daly reviewed the album's financing and found nothing untoward.
"When I told him that, he sort of disappeared on me," recalls Daly. "Some people don't like hearing what they don't want to hear." Soon after, Jackson had a blowup with Sony during which he was photographed carrying a placard portraying Sony Music's then chief as a devil-like figure.
Before long Jackson and Sony Music parted ways -- a situation that layered tension and mistrust onto his continuing partnership in Sony/ATV, which was operated as a separate entity from the music business.
At this point Jackson had a staff (or "organization," as he liked to say) numbering some 50 people on his payroll. Upkeep at Neverland was costing upwards of $4 million a year, and Jackson was also underwriting the staff and upkeep costs of the Encino, Calif., compound where his mother and other family members lived.
Jackson sought help from a colorful roster of managers and advisers that included a guy who Jackson didn't realize was a gay porn producer, a Florida lawyer who once represented mobster Meyer Lansky, a prominent member of the Nation of Islam, and Michael's own brother Randy.
Finances took a back seat as Jackson spent two years fighting new child molestation charges filed against him in 2003. During his successful defense, according to court papers, Jackson received $2 million from Sheikh Abdulla, the 33-year-old son of the ruler of Bahrain, to help foot his legal bills.
The sheikh, who had ambitions to be in the music business, had taken a shine to Jackson after being introduced by Michael's brother Jermaine. He says in court papers that he took care of the utility bills at Neverland for a time and helped Michael arrange his first mortgage on the property. The sheikh would describe his new friend as "a person who is very switched on, a fantastic businessman and fantastic intellectual."
Several weeks before he was acquitted, Jackson attended the funeral of lawyer Johnny Cochrane. There Jackson confessed his financial straits to Ron Burkle, the Yucaipa Cos. financier, whom Jackson had befriended.
Jackson asked Burkle if he would have an accountant look at Jackson's troubled finances. Burkle agreed, eventually telling the singer that his spending was untenable and he either needed to cut back dramatically or go back to work.
But Jackson told him, as he did others, that under no circumstances did he want to go back to performing. At the very least, Burkle insisted that Jackson begin signing all his own checks so that he could see how much he was paying for things.
Most of Neverland's staff was laid off, and Jackson -- who said he felt violated after police raided his home -- vowed never to return there. Soon after his acquittal, Jackson was living in Bahrain with his children as a guest of the sheikh.
Amid all the negative publicity swirling around Jackson, Bank of America quietly sold the loans it held on Jackson's interest in Sony/ATV, MiJac, and Neverland at a steep discount to Fortress Investments (FIG), a big hedge fund that specialized in distressed assets.
Because of covenant breaches and penalties, the loans now carried stiff terms, with an interest rate in the mid-teens, say two people who were involved in Jackson's finances.
Jackson's income consisted of small dividends from Sony/ATV, $10 million or so from MiJac, plus roughly $10 million from music royalties and other sources -- but that was not enough to stay ahead of his mounting interest payments and his legal and living expenses.
"He always was asset rich and cash-flow poor," one of these people says. "The best way to think about it is a middle-income family that spends too much on their credit card and doesn't care about the fees."
In late 2005, Jackson received a fax from Robert Wiesenthal, the chief financial officer of Sony's U.S. business. Wiesenthal understood that Jackson was days from defaulting on his Fortress publishing loan and offered to meet to discuss ways to help.
Besides aiding a partner, Sony was concerned that Jackson's half of Sony/ATV could end up in bankruptcy court -- or in the hands of an outsider like Burkle or Fortress. (Burkle declined to be interviewed, and Fortress did not respond to an interview request.)
Howard Stringer, Sony Corp.'s chairman, dispatched Wiesenthal to Dubai. In a gilded hotel suite, Wiesenthal met with Jackson and several of the sheikh's advisers and explained that Sony had lined up bankers from Citi who were willing to refinance Jackson's ATV debt on much better terms. And Sony agreed to a dividend policy from the publishing company that would help cover interest payments on the ATV loan.
In exchange, Sony received a freer hand to make investment decisions without Jackson's approval; a right of refusal on his stake; and an option to buy half of Jackson's half for around $250 million. To everyone else's surprise, Fortress exercised a right it held to match any financing terms and held onto its Jackson loans, though only for a short term.
Problems solved? Of course not. In Bahrain, Abdulla had given Jackson use of a Rolls-Royce and a Maybach and bought him jewelry and watches and a gold statue. But after a few months their relationship became another tale of mutual hurt.
Jackson left Bahrain, and Abdulla sued him for reneging on an agreement to start a label and record songs together -- including a Hurricane Katrina relief song they'd spent weeks preparing. Jackson claimed that he either did not know what he was signing or was misled. The case went to trial in London but was settled just before Jackson was to testify.
Jackson moved mostly around Europe with his children, at one point in 2006 living in Ireland and contemplating settling there. According to Raymone Bain, Jackson's spokeswoman and general manager at the time, although Jackson was focusing on raising his children, he was also determined to revive his career.
Jackson told Bain, a crisis specialist who had been spokeswoman for incarcerated D.C. mayor Marion Barry, that two constant subjects of media inquiry were off-limits: his children and his finances. "My finances are my business," he said. "Let them think I'm broke."
Jackson invited Bob Sillerman, the Wall Street entrepreneur who had acquired Elvis Presley Enterprises, to visit him in Ireland to talk about ways to turn Neverland into a fan destination. And although he had been hands-off at Sony/ATV, he was excited about acquisitions the company was making, even calling the legendary songwriter Mike Stoller before the company acquired the catalogue owned by him and Jerry Lieber, which, to Jackson's delight, included the Elvis hits "Hound Dog" and "Jailhouse Rock." "He wanted to really assure Jerry and me that we would be in the best of hands," recalls Stoller.
The Fortress loans were coming due yet again at the end of December 2007. Barclays refinanced the $300 million loan against Sony/ATV from Fortress. HSBC (HBC) lent $30 million against MiJac. Plainfield Asset Management, a hedge fund, loaned another $40 million against MiJac at a 16% interest rate on terms that allowed Jackson to defer payments while the amount due grew.
The financing was supposed to enable Jackson to settle 13 outstanding lawsuits and still have roughly $11 million on hand for creative ventures. The other loans against Sony/ATV and MiJac were both structured so that Jackson was unable to access any of the money -- dividends and profits went directly toward debt payments. And additional money was raised to have "interest reserves" that would make interest payments when Jackson couldn't. Frank DiLeo, Jackson's manager during his heyday, still can't believe the star let it all pile up. "I want to wake him up and slap him," he says.
Jackson was still, according to two people who advised him, running a deficit of $10 million to $15 million a year beyond a similar amount that he would bring in from royalties and new ventures like a special 25th anniversary "Thriller" album released last year.
Not counting financing charges, last year Jackson's personal expenses were around $8 million, says an adviser who reviewed his books -- counting everything from rent and Neverland upkeep to security, child care, and tutoring Jackson was receiving for moviemaking.
Fortress had held onto the mortgage on Neverland, and in early 2008 -- to the surprise of Bain and some of Jackson's other former advisers -- reports emerged that Neverland was going to be sold in a foreclosure auction, only to be "saved" for Jackson by Colony Capital.
By then Bain was out of the picture after Jackson had changed his phone numbers, which he did frequently. This time he didn't give her the new ones. Several months before he died, Bain filed a $44 million lawsuit against Jackson for, you guessed it, unpaid services.
"This is the saddest story in history," says Tohme Tohme, the man who succeeded Bain. "I had no purpose except to help him, to bring Michael Jackson back and make him the King of Pop. One consolation for me: I did it. He died the King."
In the days following Jackson's death, Tohme was portrayed in media reports as a mysterious if not sinister figure -- a portrait he feels besmirched him. A longtime Los Angeleno of Lebanese heritage and habitué of the Bel Air Hotel, Tohme comes from outside the entertainment business but declines to say what businesses he is in.
"If you are writing about Linda Lovelace, you don't need to know about John Holmes," he laughs, making an unexpected reference to 1970s porn stars.
Say what you will, Tohme was able to get Jackson working again. Tohme says that he has known the Jackson family for years, and that Jermaine asked Tohme to help his brother out in early 2008 when Neverland faced foreclosure.
Tohme had done some work with Colony Capital, which has done $39 billion worth of transactions since 1991 and owns 9% of French retailer Carrefour. Tohme persuaded Colony's Barrack to meet with Michael in Las Vegas at the rented stucco compound where the King of Pop and his kids were living. Colony owns the Vegas Hilton, and Barrack had played a role in resuscitating the career of Barry Manilow via a five-year run of shows there.
Barrack also has a ranch near Neverland, and he expressed interest in both Neverland and some kind of permanent Vegas show based on Jackson's music. He in turn spoke to Phil Anschutz, the owner of AEG (it stands for Anschutz Entertainment Group), which led to a meeting between Anschutz and Jackson at the MGM Grand late last year. Jackson was "very laser focused," says AEG Live's Phillips, who also attended. "He wanted to meet the guy who owned the company."
AEG and Tohme subsequently hashed out Jackson's deal for what eventually became 50 shows. Among its terms: Jackson would get 90% of all profits, and AEG would advance some $15 million toward the purchase of a palatial house that had been built by Prince Jefri of Brunei in Las Vegas, which had been listed for more than $100 million and which Jackson envisioned as his new Neverland.
But first AEG had to pay $5 million to Sheikh Abdulla to finally settle his dispute with Jackson (a figure that hasn't previously been disclosed). Tohme worked on other deals on Jackson's behalf, including one for a "Thriller"-based show on Broadway, TV specials, a film, and even a casino.
But several weeks before his death, there was fresh unrest in Jackson's world. Tohme was on the outs after Jackson was upset by the way he managed an auction of truckloads of his eclectic personal possessions this past April.
Jackson was apparently horrified to see the catalogue on the Internet, and the auction ended up being stopped after Jackson sued. (Tohme denies ever receiving a letter from Jackson dismissing him and says he hasn't been paid for the work he did for the singer.)
Around that time, Jackson brought back his old manager DiLeo, who in turn helped bring back John Branca, who had been Jackson's lawyer for the better part of three decades and helped him buy ATV, but with whom the singer had a sometimes strained relationship. Branca, who declined to be interviewed, has said that he last stopped working for Jackson in 2006 because he didn't like the people Jackson was surrounding himself with.
Some in the Jackson orbit, including his father, Joe (with whom Michael had long-standing and very public differences), have contended that Michael was manipulated by people without his son's best interests in mind and hint at nefarious forces behind his demise.
Both the rented $100,000-a-month Bel Air mansion where Jackson fell ill and a doctor who lived with him -- who was to be paid $150,000 a month -- were being funded by AEG. Phillips, the president of AEG Live, says he objected to having the doctor, but Michael Jackson insisted, saying that his body was their venture's most important asset.
"It's easy to make us look like the corporate villains who took advantage of Michael Jackson," Phillips told me one day in his office near Los Angeles' Staples Center, which AEG owns and where Jackson held those final rehearsals. "It's quite the opposite -- we were the people who empowered Michael Jackson and gave him his dream back."
AEG, despite having invested close to $30 million in Jackson's unrealized dream, will make money on its involvement with the estate, thanks largely to the rehearsal footage that was shot and the swiftness with which AEG and Jackson's executors formulated a plan to salvage a calamitous situation.
Sony paid what one company insider called an unprecedented $60 million to Jackson and AEG for the rights to release "This Is It" -- a price justified in part by the fact that the film deal precluded, for now, a televised tribute concert recreating Jackson's fateful stage show, which AEG has explored.
The movie is slated for a limited, two-week run. But where his estate is concerned, the Michael Jackson show is only just underway.
New creditor claims are being filed on a weekly basis, and yet to be resolved is whether Jackson's family can get along with the executors who were named in Jackson's 2002 will: Branca and music industry veteran John McClain.
Katherine Jackson's attorneys have accused the executors of conflicts of interest (their precise objections are sealed from public view) while criticizing aspects of the deals they struck with Sony and AEG.
The probate judge, Mitchell Beckloff, recently took the unusual step of granting Katherine the ability to challenge the executors without jeopardizing her inheritance, and both sides' lawyers have been trying to work out a compromise that would avoid a trial.
Estate lawyers know that high-profile celebrity cases can drag on for years, the most extreme example being Marilyn Monroe's probate, which lasted more than three decades.
Jackson's cultural resurgence will certainly continue to brighten the estate's financial situation, but more challenges are on the horizon. Next year, insiders say, the estate's groaning debts will need to be refinanced yet again.
Down the road, MiJac may be merged into Sony/ATV, which has thrived over the past couple of years. Or the estate may eventually decide that it wants to sell Jackson's musical jewels to the highest bidder to finally settle all the singer's debts and lawsuits. One day, in Las Vegas or elsewhere, fans may visit a new Neverland.
Creatively, Jackson's legacy in the pantheon of musical superstars is already secure. But when it comes to the big financial questions, it's a good bet that Jackson's executors will not be asking themselves, "What would Michael do?"