The wily Kerkorian, who controls 74% of MGM (MGM
), may still take the studio off the market. He did it two years ago, when Time Warner (TWX
) refused to meet his price. But things are different this time, say those close to the deal. For one thing, even though talks are being handled by his trusted lieutenant, MGM Chairman and CEO Alex Yemenidjian, Kerkorian is more actively involved than he was then. Plus, two entertainment giants, Time Warner and Sony (SNE
), are competing to buy the studio.
It looks like Kerkorian will get his price. At $4.6 billion -- the number that Time Warner is offering -- MGM is valued at roughly 10 times cash flow, according to Merrill Lynch analyst Jessica Reif Cohen, which she calls "a full but fair valuation."
NO OUTLETS. Why is Kerkorian selling now, after holding on for so many unprofitable years? After all, he has sold and bought the studio back twice since he first purchased it in 1970. But this time, a sale is likely to be for good. Kerkorian has been boxed in, unable to expand the studio into the kind of world-beater that he and Yemenidjian envisioned in 1999 when Yemenidjian left Kerkorian's casino company to take over MGM.
With a library of more than 4,000 films, including such heavyweights as the James Bond series, MGM is the perfect company for the Digital Age and its multiple distribution outlets. Only one problem: MGM doesn't own any cable channels, TV networks, or broadband pipes. Yemenidjian and Kerkorian tried their darndest to change that, at various points approaching NBC (GE
) about a merger and talking with cable giant Comcast (CMCSA
Yemenidjian also trimmed overhead, reduced film budgets and eliminated debt, which positioned MGM for last year's $11.5 billion bid for Vivendi Universal -- a bold, last-ditch effort to become a supersize content company. But when Vivendi eventually decided to merge with General Electric-owned NBC, Kerkorian knew he had lost his final chance to turn MGM into a major Hollywood force, according to someone close to the negotiations.
FADE TO BLACK. In Las Vegas, however, Kerkorian's fortunes are another story. His MGM Mirage (MGG
) is a bona fide powerhouse, with such major casinos as the Bellagio, MGM Grand, New York-New York, and the Mirage. This year, MGM Mirage, which also owns casinos in Detroit, South Africa, and Australia, will generate more than $356 million in net income, according to UBS Securities analyst Robin Farley, a 38% increase over 2003.
And with its pending $7.9 billion deal to buy Mandalay Resort Group (MGB
), MGM will control about half the Strip, where revenues are up some 16% over last year, says Farley. He has a buy recommendation on MGM Mirage, figuring its stock will jump to $60 a share within the next year from its current $42.60 or so. Even though Mandalay Bay reported second-quarter earnings on Sept. 2 that disappointed Wall Street, Farley figures its earnings will increase by 30% next year, driven by strong results at its Vegas properties.
Back in Hollywood, all that seems left for Kerkorian to do is crown the winner in the contest to buy his studio. In a way, it doesn't matter whether it's Time Warner or Sony. Either is likely close down MGM's filmmaking operation and ramp up the sale of its library, which Reif Cohen estimates will generate cash flow of $450 million in 2005. (MGM, Time Warner, and Sony all declined to comment for this story.)
LAWSUIT BAIT? Most likely to succeed is Time Warner's $4.6 billion bid, even though Sony is expected to offer $4.8 billion, both all cash. There's some doubt that Sony can keep its two equity investors, Texas Pacific Group and Providence Equity Partners, in line to make an all-cash offer.
Time Warner altered an earlier bid, which would have paid Kerkorian roughly $2 billion in unregistered stock as part of the deal. Kerkorian had initially wanted the stock, say those close to the talks, because he thinks it's undervalued. Now, these sources say he's worried that growth in Time Warner's stock price could leave him open to lawsuits from other MGM shareholders, who will get cash for their shares.
With 174 million MGM shares, Kerkorian will walk away with around $2 billion in a cash deal. That's on top of the $1.4 billion he collected earlier this year when MGM declared a one-time dividend of $8 a share. Given that he has already investing some $3 billion in MGM over the last eight years, it's not a great score. But that's show biz. Besides, he seems to like the odds better in Vegas, where the house always seems to win. Grover is BusinessWeek's Los Angeles bureau chief