Is Disney Ready To Go To School?

Chris Whittle has scaled back his Edison Project so many times that critics were starting to wonder whether it was turning into a Mickey Mouse venture. Soon, that may be just the name for it.

Mickey's creator, Walt Disney Co., has stepped up talks to buy control of the Edison Project, Whittle's ambitious and controversial plan to build a profit-making school system. Investment bankers familiar with the negotiations say Disney may plunk down $500 million for as much as 80% of the Edison Project and Channel One, a satellite-TV service that beams current events and commercials into nearly 12,000 schools.

TENNESSEE WALTZ. Disney and Whittle both declined comment on the talks. And observers caution that Disney has passed on such properties as the MGM/UA film studio and Sea World after similarly serious talks. But a top Disney executive confirms that the entertainment giant has sent a team of financial analysts to scour the books at the Knoxville (Tenn.) headquarters of Whittle's media and marketing company, Whittle Communications. One banker close to the company says Disney has become more interested in the venture since Whittle lowered his price from $1.3 billion in May to around $700 million now.For Whittle, who has staked his reputation on the Edison Project, Disney may be a last hope. Whittle has been trying for months to raise $750 million to break ground for his model schools. He hired Salomon Brothers Inc. to line up prospects. But few have offered cold cash.

Whittle has been desperate enough to offer equity stakes in the project in return for products or services (table), bankers say. McDonald's Corp., for example, may run the school cafeterias, while Apple Computer Inc. could donate computers. Apple confirms that Chairman John Sculley held discussions with Whittle last winter, though Apple's troubles make a deal unlikely anytime soon. McDonald's wouldn't comment.

For Disney, hooking up with Whittle would mark a splashy entry into the evolving business of multimedia education. Disney already has more than 450 educational films in its library. And the company is pumping out 20 titles a year for the interactive laser-disk market: Jiminy Cricket takes you on an interactive tour of the human ear, for example. A Whittle deal would give Disney Chairman Michael D. Eisner access to an audience of 8 million. Says one banker: "I think Eisner is susceptible to the `I'm out of the loop' syndrome."

SCALING BACK. Still, Disney must look before it leaps. Whittle has been downshifting ever since he lured former Yale University President Benno C. Schmidt to head the Edison Project in May, 1992. At that time, he talked about raising $1.2 billion to build 200 campuses by 1996. Then, a Whittle spokesman says, he decided to take over existing public schools, which cut his investment requirements. By building fewer schools from scratch, Whittle was able to lower his capital costs from $1.2 billion to $750 million. Whittle also slashed his $60 million R&D budget by shortening his research and development period.

Whittle's spokesman claims the project is now actually a year ahead of schedule. Whittle plans to build his first schools in 1995 instead of 1996. And his shift in focus came after public-school systems expressed interest in trying the Edison model.

But there are signs that Whittle is under pressure. For one, the Disney deal would make him give up Channel One, his most successful venture. The service generates roughly $100 million a year in ad sales.

Certainly, Whittle can't bankroll the project with his other businesses, such as Special Report Network, a TV and magazine service for doctors' offices. The company's fiscal 1993 revenues will be flat at about $230 million, and profits have eroded as Whittle phases out his print-media products. This uneven performance has soured Whittle's relationship with Time Warner Inc., his largest shareholder. Executives familiar with the company say Time Inc. Chairman Reginald K. Brack Jr. is mulling over ways to reduce the 37% stake. Time Warner declined to comment.

If a deal were to happen, Disney would presumably buy out Time Warner's stake in Channel One and Edison. But Time Warner would retain 37% of Whittle's remaining assets. It's not clear how such a deal would affect Whittle's two other principal shareholders: Dutch consumer-electronics giant Philips, which owns 25%, and Britain's Associated Newspapers Holdings, which owns a 24.6% stake.

Just in case Disney doesn't buy into the Edison Project, Whittle is already placing other bets. Executives close to the company say he is developing a spin-off of Channel One to be called PE TV, which would beam fitness programs into gym classes. And he is also building a TV production arm. But unless Whittle keeps his deal with Disney alive, these projects could end up seeming a little Mickey Mouse themselves.

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