Metro-Goldwyn-Mayer Inc. has begun discussions with Wall Street firms about the timing of an initial public stock offering, amidst suggestions from some parts of the company that it should go public as early as the fourth quarter of this year, Wall Street sources say.
In recent weeks MGM execs have met with bankers from JP Morgan, Bear Stearns, Merrill Lynch and Goldman Sachs, Wall Streeters say, to get broad-ranging advice on the company’s long-term financing options, sources say.
As part of such a review the company has looked at the debt markets and the private equity markets as well as the timing of a public stock offering.
Several bankers involved say it’s clear that no decision has been made about taking MGM public, but people close to the Lion acknowledge that a stock offering is now more likely sooner than previously thought, and that it could be done later this year.
Orion buy ups ante
Sources say the $573 million acquisition of Orion Pictures, which is now expected to close in mid-July, has accelerated the possible timing of an offering because the acquisition will increase MGM’s earnings before interest, taxes, depreciation and amortization, and therefore make the company more attractive to investors.
But the discussions are complicated by differences of opinion within MGM over when to go public.
“There are several different decision-making bodies here and not everybody is on the same page,” said one person familiar with the talks, noting that the decision will be made by MGM’s two shareholders, Kirk Kerkorian’s Tracinda Corp. and the Seven Network of Australia, as well as by the management team led by chairman Frank Mancuso.
Seven chairman Kerry Stokes has told the Australian press repeatedly in recent weeks that MGM will go public in mid-1998, suggesting he and his U.S. financial adviser, Michael Gleeson, prefer an earlier offering. It’s not clear what position Mancuso and Kerkorian are taking, and an MGM spokesman declined comment.
Pros and cons
Those involved in the discussions from all sides agree there are good arguments both in favor of and against an earlier public offering. If the company decides to go public this year, bankers say the most likely time is in the fourth quarter, shortly before the opening of the next picture in the James Bond franchise, “Tomorrow Never Dies.”
But an offering later this year might be harder to market to investors because MGM’s financial information would be earnings for part of this year and last year, periods which were both affected by the hiatus in new production that began when the studio was put on the market in late 1995 (before its sale last summer).
MGM can’t expect to have a “normal” earnings period, reflecting the return to typical production activities after the sale, until 1998. An offering done before then may suffer from analyst complaints about the lack of reliable earnings, Wall Streeters say.
On the other hand, the only truly reliable earnings flow comes from the library, an area beefed up in the Orion sale, which supports the argument for an earlier offering. Additionally, Wall Streeters say the stock market may not be as strong through 1998 as it is now, supporting the case for an earlier offering.
And if “Tomorrow Never Dies” doesn’t do as well as MGM hopes, it may hurt the chances of an offering done later. Pricing an offering just before the picture opens, however, takes advantage of the hype surrounding the picture without being hurt by lower-than-expected grosses.
How seriously MGM needs an offering for capital-raising purposes is not clear. People close to the Lion insist raising money isn’t the driving force, and some sources say MGM has drawn down little of its $350 million revolving credit facility, although that will likely change as production continues to ramp up.
But Wall Streeters say MGM will likely have to refinance its bank debt eventually, whatever happens, and that need is driving the broader, longer-term financing review.
The advantage of a public offering is it makes it easier for shareholders to exit and also allows the shareholders to put a value on their investment, which may be a consideration for Seven and its shareholders in Australia.
One banker said MGM could always do a small public offering earlier and raise a bigger amount of money later in a secondary offering. The problem with that approach, another says, is that the amount of stock available would be small so the stock would not trade well.