MGM's private equity owners are shopping it for $5.2 billion, but the fabled studio faces skeptical bidders and a ticking clock on its credit line
Editor's note: The following version of a story published Aug. 22, 2008 corrects how much of a $500 million revolving credit line MGM has committed and removes an incorrect deadline for when United Artists must produce four films.
The fabled MGM studios, which seems to have had more owners than its James Bond character has had lady friends, is on the block once more. The studio, currently owned by a consortium that includes private equity funds and cable giant Comcast (CMCSA), has asked Goldman Sachs (GS) to sound out potential suitors, according to two sources with knowledge of the process. The asking price—said to be $5.2 billion—is considered hefty for a company that has had few hits and recently jettisoned one of its two top filmmaking executives.
Metro-Goldwyn-Mayer refused to comment. But those with knowledge of the overtures say the company has asked Goldman, which advised the studio when it was last sold in 2004, to focus primarily on so-called strategic buyers—namely other entertainment companies that would likely fold MGM into existing operations. Among those who are said to have taken a look, and so far passed, is the Mumbai-based Reliance ADA Group, which is reportedly in the final stages of providing $500 million in funding to director Steven Spielberg to establish a new DreamWorks film company. Reliance could not be reached for comment.
The decision for MGM to sound out potential buyers is said to have come from its private equity owners, including Providence Equity Partners and TPG. Those two firms, along with Comcast and Sony (SNE), paid roughly $5 billion in debt and equity in September 2004 to acquire the then-publicly traded MGM from its majority owner, billionaire Kirk Kerkorian. In a twist, Kerkorian is said to have recently offered roughly $3 billion for the 84-year-old company, a bid that was quickly dismissed. Kerkorian was not available for comment on Aug. 22.
DECLINING DVD REVENUES
Even so, it is unlikely that the current MGM owners will get their $5.2 billion asking price, according to one prominent Wall Street dealmaker who has been privy to the thinking of potential buyers. The studio, home to such iconic franchises as James Bond, Rocky, and the Pink Panther, generates much of its revenue from a 4,000-title library of older films. Last year that catalog generated $558 million in cash, but the DVD market has begun to decline seriously. At the end of August, the company will get the last of a series of distribution fees totaling $625 million from News Corp.'s Twentieth Century Fox (NWS), which distributes MGM's DVDs. The private company lost $400 million in its most recent fiscal year, which ended in March, MGM told The New York Times (NYT) recently.
In 2009, MGM is scheduled to win back the rights to the James Bond franchise from Sony, which Sony won for its help in assembling the 2004 buyout. Bond is clearly the studio's major selling point, with that franchise alone estimated to be worth $2 billion. But MGM is still struggling under massive debt—$3.7 billion from the initial acquisition and $150 million it has committed from a $500 million revolving credit line its CEO, Harry Sloan, arranged for the company's United Artists unit. The first film under that fund—the 2007 Robert Redford-Tom Cruise-Meryl Streep flick Lions for Lamb—lost about half of MGM's $75 million investment. Another UA film, the World War II thriller Valkyrie, will cost $180 million to produce and market later this year.
The problems at UA forced a change at the top in mid-August, when CEO Paula Wagner stepped down. Wagner, a former agent and Cruise's longtime producer, came to UA with Cruise in late 2006. Together the two own a 35% stake in the studio. MGM says Wagner is transitioning to make films for the studio, and that Cruise will continue to work at the studio.
PRODUCTION CASH CRUNCH
MGM chief Sloan, who was brought in by private equity owners to run the combined MGM and UA studios, has been hustling to put films into production. Earlier this month, MGM's board gave Sloan a new three-year contract, which also will ensure management continuity. Sloan, whose history as an entrepreneur includes creating—and selling—a small Hollywood studio and large European TV company, has also created several cable channels to generate cash from MGM's library. But his early effort to distribute films for independent filmmakers such as the Weinstein Company produced few hits. More recently, Sloan hired Mary Parent, a former top Universal Pictures executive, who has aggressively put projects into production. Still, the company has been constrained in raising added cash for production by the current credit crunch: Royal Bank of Scotland (RBS), which is attempting to raise a $500 million credit line, has been slow to line up institutional investors.
Who's likely to want to buy MGM? Most likely a "strategic buyer." Several are said to be interested in kicking the tires. Qualia Capital, an investment fund focused on media and entertainment, has already been approached by two different groups about acquisition financing, says one source with knowledge of the overtures. The New York-based fund refused comment. The most likely buyers include Sony, which owns a 20% stake. Fox might also be a buyer. Fox refused comment; Sony declined to comment.
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