If we had to put a value on MGM back in 2004 when it was acquired by a financial group led by Sony, the only content owner among bankers and private equity players, it would, retrospectively be the influence that 4,000 surviving MGM films had on swaying the next generation DVD standard Blu-ray’s way.
Even in 2004 Sony was aware that it needed to control more US created media in order to win that DVD battle. Now the assets of MGM are up for grabs once more and Sony is in no position, and has less need than ever, to bid for the remainder of the moribund studio group.
MGM makes very few pictures ‘ it has instead got rock solid distribution channels into cinemas, broadcasters and cable operators, and acts as a conduit for Bond movies and a handful of other original material owned elsewhere.
But its problem is that it was acquired mostly with debt and now has some $3.7 billion to pay back, with some debt deadlines imminent. It can no longer afford to look around for money, and all debt payments have been shoved back to the end of January in order to given it maneuvering time. It has a hard stop on debt one repayment in April.
Right now MGM takes in around $500 million each year but pays out over $250 million in interest and during the recession its revenues may well have fallen below its income.
A sale to more financially oriented players seems likely with the incumbents ‘ a group including Sony, Comcast, Providence Equity Partners and TPG ‘ taking a hit on their 2004 investments. MGM has long been a rich man’s pass the parcel investment, used to turn piles of money into a revenue stream for a while, and then back into cash. Prior to this group owning MGM, billionaire Kirk Kerkorian held it from 1969 to 2004 and made money on the sale. MGM could return to being a cash engine once the recession turns down a notch and the same thing could happen.
MGM is reported to have a hard deadline of $250 million in April and further debt deadlines later in the year and in 2011 and 2012 and the only way that it can meet all of them is to be sold, even if it is paid for by the creation of new debt, set further out.
This week Liberty Media was included in speculation that it could become the buyer, to go with connections already made with Time Warner, and others.
It’s not that MGM will have any problem finding buyers, because it has half of the historical archives of Hollywood, its just that the price that it can command is based more on sentiment than on its ability to service the debt that such a purchase will create.
This month some 20 companies expressed an interest in buying some part of MGM, with Warner Brothers, Fox, and Lionsgate understood to be in a bidding war. Now it appears that Liberty has thrown its hat in the ring for the library assets. If MGM sells everything, it is thought the highest price it could fetch is $2.5 billion, which would leave $1.5 billion in debt unpaid. And in five years, no doubt, it will all happen again.