News: Analysis & Commentary: DEALS
FOR HOLLYWOOD, THAT'S SLOW BIZ
The market for studios is falling faster than a Demi Moore flick
In the heat of mid-July, the prospective sale of Metro-Goldwyn-Mayer Inc. was melting down. No one had offered anywhere near the $2 billion expected, and investment banker Lazard Freres & Co. was set to search for new buyers. In his Las Vegas office at the MGM Grand Inc. casino, company President Alex Yemenidjian fielded a call from the casino's majority shareholder, Kirk Kerkorian. "Can you believe how little the bids are?" asked Kerkorian, 79. "Why don't you make a call?"
Yemenidjian's call set a new bid in motion. Within days, Kerkorian had joined MGM Chairman Frank Mancuso and Australia's Seven Network Ltd. broadcast group to buy the studio for the bargain price of $1.3 billion in cash. For Kerkorian, who bought MGM in 1969 and sold it in 1990, the deal marked his return to Tinseltown. For the rest of Hollywood, it was a rude awakening.
The red-hot days of bidding up movie studios may be over. Two years after Barry Diller and Viacom Inc. Chairman Sumner M. Redstone sent Paramount Communications Inc.'s price to $10 billion, the market for studios is flat to nonexistent. Rising production and marketing costs, and an overcrowded box office, have squeezed margins and crimped asset values. And with most of the prized companies already in the hands of media conglomerates, buyers are dwindling for the second-rung companies that remain.
The most prominent in that tier is beleaguered Sony Pictures, which announced on Oct. 8 that it had hired former United Artists Pictures Inc. President John Calley to head a new management team. Many believe Calley is coming aboard to clean up the troubled studio for a sale or spin-off. "If they can survive another year or two, they might be able to get good money for it," says BZW Ltd. analyst Dave Benda. For now, though, Sony Pictures probably is worth less than $5 billion, steeply off the $8 billion at which Sony Corp. valued the studio when it tried to find investors for a piece of the unit in 1992.
SPELLING ERROR. In short, "this is an industry that doesn't pencil out anymore," says Alan F. Horn, chairman of Castle Rock Entertainment Inc. In other words, revenues barely cover costs--and would-be investors are figuring that out. In early October, General Electric Co.'s NBC pulled out of a deal with MCA to buy Castle Rock, a unit of Turner Broadcasting System Inc. NBC wanted Castle Rock's TV production, but balked at shouldering its share of film production costs.
Until recently, studio sales fetched multiples of 15 to 20 times cash flow. These days, multiples have plummeted for even the most respected companies. New Line Cinema Corp., which Turner Broadcasting purchased for $600 million in 1993, has hired investment banker Furman Selz to find buyers for a 25% to 30% stake. Turner's valuation: $1 billion, which analysts say is just 12 times cash flow. And even with solid management and a powerful library, "it's not going to be easy to sell at that price," says one investment banker.
Studios, especially those with libraries of older hits, can still command interest for their capacity to fill both overseas distribution and emerging channels such as satellite-delivered TV. But those markets aren't growing fast enough to offset production and marketing costs that have jumped 23% in the last two years, say industry executives. That's why, earlier this year, Viacom took its 75% stake in Spelling Entertainment Group off the market. Last year, Seagram Co. bought 80% of MCA Inc. for $5.7 billion from Japan's Matsushita Electric Industrial Co., which five years earlier had paid $6.6 billion. "You could just as easily leave that money in the bank and get a better return," says Polygram Film Chairman Michael Kuhn, who lost out on the bidding for MGM.
In Hollywood, however, hope springs eternal. Even Kuhn sounds as though he's scrounging around for bargain buys. "Prices are definitely going in the right direction, aren't they?" he says. Studios may yet find their buyers.By Ronald Grover in Los Angeles, with Brian Bremner in Tokyo and Elizabeth Lesly in New YorkReturn to top