Mike Milken Swings And Misses

He and a few big-name pals are getting burned at ICS Communications

In 1990, Michael R. Milken pleaded guilty to six felony counts of securities law violations. He paid more than $1 billion in fines and restitution and was banned from the securities industry for life. After serving two years in jail, he is still waiting for his probation period to end, in late October.

With such a past, Milken can't be doing much wheeling and dealing, right? Wrong. The former junk-bond kingpin still has a knack for putting together deals with his old circle of friends. But what is missing--in one instance at least--is the old Milken knack for picking winners.

The loser is ICS Communications Inc., a small, private Dallas-based company that provides apartment dwellers with cable-TV and phone service. Milken was an early investor, and two of his clients, MCI Communications Corp. and News Corp., soon followed suit. Milken also recruited Thomas Spiegel, another member of his inner circle in the 1980s. And when ICS overexpanded, Shared Technologies Fairchild Inc. was brought in to manage ICS. That company's vice-chairman, Jeffrey J. Steiner, was a big beneficiary of Milken's junk-bond machine. All in all, $200 million has been poured into ICS, says Steiner. "The performance [of ICS] has been terrible." Mervyn L. Adelson, who helped launch ICS, agrees: "Everybody involved underestimated the amount of capital it would need in order to provide what the clients wanted."

Milken's spokesman, Michael Reese, says Milken is spending most of his free time working on efforts to find a cure for prostate cancer, from which he suffers. He "remains a passive though interested investor" in ICS. Reese confirms that Milken lost money in ICS but won't say how much.

The ICS saga began in 1993 when Merv Adelson's sons, Hollywood producers Andrew and Gary, bought Casden Cable, a Los Angeles cable-TV service, and renamed it ICS Communications. Adelson, the former head of Lorimar Telepictures, interested Milken in the company in February, 1994. Milken would eventually invest about $25 million, according to sources familiar with the deal. Reese, however, says Milken invested far less than $25 million in ICS and mostly in the form of a loan. The company provided cable-TV service to about 4,000 households and had about 35 employees.

At the time, the market for what is called shared tenant services was in its early days. The idea was for ICS to sign contracts with apartment building owners to provide all of the tenants in their buildings with cable-TV and phone service. ICS would then install satellite dishes on the roofs, wire the buildings, and provide an array of services, from television channels just for building news to electronic security. "It was a great-sounding idea. If you hook up the landlord, you control distribution to the building," says one banker. "Milken was very excited about the prospects."

But fairly quickly, ICS began to veer off course. It mushroomed to 250 employees and 100,000 subscribers, with about $35 million in revenues. Instead of zeroing in on a small number of cities and concentrating on providing good service, it bought a company called MaxTel and expanded its operations to 35 states in an effort to go national. Spread so thin, it couldn't even bill its customers for services rendered. "They made a huge number of commitments and simply weren't able to construct the systems they promised to build," says John Mansell, senior analyst at Paul Kagan & Co. Says Kevin Schottlaender, the Shared Technologies executive who is now running ICS: "I can't disagree that they grew too damn fast. I hope to prove to our clients that we're serious about customer service and putting these issues behind us."

Milken then recommended Spiegel to Adelson and Spiegel was hired as an ICS management consultant and a director, confirms Reese. Spiegel ran Columbia Savings & Loan, which bought billions of Drexel junk bonds, and was acquitted of charges of looting the Beverly Hills thrift. He worked two months as a consultant yet is still a director. Spiegel did not return calls.

By yearend 1994, ICS needed money badly. "Milken introduced MCI and News Corp. to ICS and they became the largest investors," says a banker with knowledge of the deal. MCI and News Corp. each ponied up $30 million, say former ICS employees and bankers. Milken had been close to MCI since 1983, when Drexel Burnham Lambert Inc. raised $1 billion for MCI. In 1995, Milken advised MCI on its $2 billion investment in News Corp. Frank Walter, an MCI spokesman, didn't respond to questions and minimized MCI's involvement with ICS. "We're a minority investor," insists Walter.

Adelson says he approached MCI on behalf of ICS, not Milken. However, Adelson credits Milken with introducing him to MCI'S Bert C. Roberts Jr. at a charity dinner in Los Angeles. Roberts was seated next to Adelson and Milken and their respective spouses. Milken introduced the two men and mentioned his investment in ICS. "I did the negotiations with MCI," says Adelson. Adelson says he also approached News Corp. and that he already knew Rupert Murdoch. "I brought them in. Mike may have provided an introduction, but he had nothing to do with the negotiations." News Corp. would only confirm that it has a minority stake in ICS.

Milken denies he solicited money from MCI, News Corp., or any other investor, nor did he play a management role in ICS. "He never exercised control or attempted to exercise control by imposing individuals into management positions and has never been paid a fee by MCI or ICS of any kind," says Reese.

Milken did take more than a passing interest in his investment. "We had periodic meetings with him," says David Burdge, a former ICS senior vice-president.

Yet for Milken, the issue of who raised funds for ICS and whether he received a fee is the crucial one. For his probation to end, the Securities & Exchange Commission has to conclude its investigation into his role in three transactions. At issue is whether Milken is adhering to his lifetime ban from the securities industry. The ban requires that Milken not be "engaged in the business of effecting transactions in securities for the accounts of others," says John J. Coffee Jr., a securities law professor at Columbia law school. It's O.K. if as an investor, he is just helping his company get financing, says Coffee. But "add a fee to it and it's something that could cause a problem," says Coffee.

By fall, 1995, MCI realized it had to take direct action to rescue its investment. MCI replaced Andrew and Gary Adelson, who were co-chairmen, with a CEO from MCI. The offices moved to Dallas from Los Angeles. Andrew and Gary Adelson declined comment.

ICS was still hemorrhaging cash. Enter Nomura Securities International Inc. and its chairman, Max Chapman, who had just met Milken for the first time at a Nomura real estate conference in Arizona. Despite the poor condition of the company, Nomura granted a $77 million bridge loan. Some $29 million went to MCI and $5 million more went to Milken to repay their loans to ICS, with $17 million to MaxTel. Only $26 million went to ICS. Eight days later, the loan went into technical default--it failed to meet its loan covenants because it missed certain financial ratios. Nomura spokesman P.J. Johnson says the firm "does not comment on current deals or proprietary investments."

KEY HELP. In June, MCI announced a joint venture with Shared Technologies to run ICS. Its vice-chairman, Steiner, says he spoke to Milken on the phone about the deal and that Milken was "quite happy Shared Technologies is taking over management." Steiner says the deal jelled after talks between Adelson and Anthony D. Autorino, the CEO of Shared Technologies, and then conversations between Autorino and MCI.

Nomura and MCI are trying to restructure the bridge loan. One key executive involved in that loan, Robert D. Long, resigned in July over what insiders say are differences of opinion over how the bridge-loan business should be run. Right now, ICS is losing big money. In recent weeks, MCI has been putting about $1.5 million a week into ICS to keep it going, say sources close to the deal. Nomura could see losses of $25 million, say sources close to the company. As for Milken, he is still about $20 million in the hole.

It's possible that the new management at ICS can turn the company around. But even if that happens, the ICS deal will not go down as one of Milken's shining plays.

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