January 18, 2010 NY TIMES
In Hollywood, Grappling With Studios’ Lost Clout
By MICHAEL CIEPLY and BROOKS BARNES
LOS ANGELES — A proposed sale of Metro-Goldwyn-Mayer, the most powerful and lucrative studio during the golden age of film, drew only meager offers last week, and now Hollywood must confront a troubling question: Are movie studios becoming a financial footnote?
Loaded with debt and virtually at a standstill, MGM — now owned by a consortium that includes Sony, Comcast and the investment firms Providence Equity Partners and TPG — put its skeletal remains on the block in a complicated process that allowed potential bidders to review detailed financial information after showing their bona fides and indicating a price range based on a partial look at the books.
Time Warner, Lionsgate Entertainment and smaller private companies showed interest, but signaled offers of less than $2 billion — and perhaps as low as half that — for a company that was bought in 2004 for about $5 billion.
In a report published by Barclays Capital this month, Anthony J. DiClemente and George L. Hawkey estimated that even studios much healthier than MGM, bitten by falling DVD revenue and a 30 percent decline in operating income from 2007 to 2009, had experienced a sharp reduction in their relative importance to the media companies that own them.
“While we enjoy thinking about the film business, the reality is that film doesn’t matter nearly as much to the stocks of media conglomerates as it previously had,” Mr. DiClemente and Mr. Hawkey wrote.
Looking at Warner Brothers (a unit of Time Warner), Paramount (Viacom), Disney Studios (the Walt Disney Company) and 20th Century Fox (the News Corporation), the Barclays report reckoned that such studios, on average, accounted for only about 10 percent of the “enterprise value” of their parents.
In a separate report published last month by Global Media Intelligence, Roger Smith, an analyst and former film executive, wrote that Universal Studios, with just $170 million in operating income on revenue of $3.8 billion in 2009, was not a significant factor in Comcast’s proposed deal to acquire control of the studio’s parent, NBC Universal.
Susan Arons, a spokeswoman for MGM, declined to comment on the bidding for the studio. In a statement on Friday, the studio said it had finished receiving “indications of interest” from potential bidders and was reviewing them before proceeding.
MGM pays about $300 million a year in interest on a $3.7 billion loan and faces $1 billion in payments in June 2011. The rest of the loan is due the next year. MGM also has a $250 million line of credit that matures in April.
If MGM’s 140 creditors feel bids are too low, Stephen F. Cooper, a turnaround expert hired as chief executive in August, may need to look for another way to salvage the company.
There are backup options. For instance, Qualia Capital, a private equity fund run by the Hollywood veteran Amir Malin, has floated the idea of converting some of the debt to equity, infusing MGM with about $500 million in cash and keeping it going in a stripped-down form until the market improves.
Two people involved with the bidding, who spoke on the condition of anonymity because of restrictions on the discussion of the process, said they believed virtually all of the final bids would require a bankruptcy filing that would allow any new owner to proceed without the old obligations.
Hollywood has been rife with speculation about potential bidders. The News Corporation may wade into the auction, with reports that a bid might involve Peter Chernin, the company’s former president. But Mr. Chernin has “little to no interest” in MGM, according to a spokeswoman.
Meanwhile, some who monitor the film business have been struck by the way
MGM’s collapse in value has defied a long-standing bit of conventional wisdom: that studios, like sports teams, may lose money, but their owners ultimately do not.
“I don’t believe, fundamentally, that the value of a movie studio is necessarily going to drop going forward,” said Stephen Prough, a founder of Salem Partners, an investment banking firm in Los Angeles.
Mr. Prough said, however, that tight capital had put a damper on corporate acquisitions, those of movie companies included. And
film libraries — a major component in studio value — have decreased in worth over the last three years because of falling home video revenue, even though distributors have had stronger results at the box office.
Mr. Prough declined to comment specifically on the MGM transaction to avoid possible conflicts should his company become involved.
As recently as September, Disney paid $4 billion, a 29 percent premium over market price, to acquire Marvel Entertainment, proving that a film company built around superheroes and fantasy sequels could still command big bucks.
Yet the market capitalization of Lionsgate Entertainment, an independent studio, has tumbled to about $650 million, roughly half what it was three years ago, despite steady additions to its asset base from the filmmaker Tyler Perry, from the “Saw” horror franchise and from the television series “Mad Men.”
Pegging the market value of any particular studio is treacherously difficult because so much depends on the willingness and ability of buyers to pay a premium for access to a glamorous world in which face time with movie stars and tickets to the Oscars remain very much a part of the package.
In the case of MGM, the glamour factor is low. It has all but receded from film production and had only one release last year — a dismally performing remake of “Fame.” MGM controls the James Bond and Pink Panther franchises, and retains potentially lucrative film rights to “The Hobbit.” But without the leverage of new hits, the studio’s 4,000-film library has become less valuable.
In years past, when growing home video revenue helped lift the film business, studios could take considerable abuse and still hold their value. Thus, Kirk Kerkorian, when he owned MGM in its various incarnations, managed to sell the studio profitably at least four times. Before selling to the current owners for $2.85 billion and about $2 billion in assumed debt in 2004, Mr. Kerkorian had bought it from Credit Lyonnais, the French bank, in 1996 for $1.3 billion.
The Coca-Cola Company did similarly well with Columbia Pictures in the 1980s. After buying the studio for about $750 million in 1982, it restructured the operations, and in 1989, sold what by then was a 49 percent interest in Columbia Pictures Entertainment to the Sony Corporation for roughly $5 billion in cash and assumed debt.
Marvin H. Davis, the oil entrepreneur, paid about $480 million to buy 20th Century Fox in a pair of transactions in the early 1980s. He then sold to the News Corporation, controlled by Rupert Murdoch, in stages for about $575 million, having drawn some millions from the studio in cash flow in the interim. The News Corporation still owns Fox, which, Mr. Murdoch pointed out on a recent investors’ conference call, yields more than its purchase price in profit every year.
Following the ins and outs of Universal is more difficult, as the studio went through a series of complicated sales, in which its ownership moved from MCA Inc. to Matsushita to Seagram to Vivendi to General Electric, and now to its proposed owner, a co-venture between G.E. and Comcast.
The bundle of operations within which the studio was sold changed over the years, making it virtually impossible to isolate its exact value. But the buyers appear roughly to have matched what Matsushita paid for the studio when it bought MCA’s various assets, which then included a music company, for $6.6 billion in 1990.
Even Universal, a well-tended studio despite its recent troubles at the box office, may now be worth less,however — at least until some new technology once again raises the value of its library.
“If Comcast wanted to sell Universal as is, I don’t think getting close to $6 billion would be possible,” said Mr. Smith, the analyst.