Lion’s stock offering just scratches surface

NEW YORK — Wall Street gave Metro-Goldwyn-Mayer Inc. a weak reception when the Lion stock began trading on the New York Stock Exchange Thursday, with MGM stock trading most of the day below its $20 offering price before some late-afternoon orders pushed it to a close of $21.

Wall Streeters were generally surprised by the poor performance, as initial public offerings are almost always priced at a level to ensure a stock spurt on the opening day of trading. “It looked like hell this morning,” said one analyst.

Instead of jumping up, MGM stock fell to a low of $19 through the day and didn’t move above the offering price until the last hour of trading, when an order for 400,000 shares at $20 lifted the stock from $19.18 and turned the momentum of the trading in a positive direction.

The identity of the late-afternoon buyer could not be established, although many Wall Streeters speculated it was the deal’s underwriters supporting the price, as is permitted in the opening days of trading in a new stock.

Execs from Merrill Lynch, the lead manager on the offering, did not return calls. One person close to the deal insisted the offering had turned out well, arguing that the closing price was all that mattered. But others on Wall Street had a different view.

“It’s a terrible sign when an IPO trades down,” said one investment banker, who added that it suggests MGM’s stock price will fall further in coming weeks when the stock trades without any support from underwriters.

Other bankers said the stock trading suggested that Merrill, which was finalizing the offering Wednesday during a big market sell-off, had been unable to place it with clients willing to hold it for long.

About 4.9 million shares changed hands during the day, more than half the number sold in the offering Wednesday night. It is standard to have extremely heavy volume on the opening day of trading, as investors known on Wall Street as “flippers” dump the stock received in the IPO — although usually flippers are selling at a quick profit rather than a quick loss.

MGM and its underwriters had gone to some lengths to ensure a better performance. After encountering some resistance from investors to the deal, MGM cut the size of the public offering from 12.5 million shares to 9 million shares Monday, and Wednesday’s pricing of the offering was at the bottom end of the $20-$23 proposed pricing range.

Given all that, Wall Street analysts said the opening day’s trading reflected investors’ wariness toward film companies and uncertainty about MGM’s prospects. “I wasn’t terribly surprised (by the trading). I think there was tepid interest at best in the offering,” said Ryan Jacob, research director of the IPO Value Monitor.

Ryan said the deal was speculative, given MGM’s own statements that it is not profitable now and doesn’t expect to make money for several years.

MGM’s backers complained that people who criticized the deal did not understand the Lion’s business plan and the studio was hamstrung in countering the misperceptions by securities regulations that inhibit what can be said publicly from the time the prospectus is filed with the SEC until 25 days after an offering goes to market.

MGM chairman Frank Mancuso told investors on his two-week roadshow of the U.S. and Europe, however, that MGM’s prospects were based largely on increasing earnings from the film library, as distribution rights revert back to the company over the next five years, rather than the more risky business of trying to make huge profits from new releases.

But his message was obscured by several events occurring in recent weeks, including the market’s exceptional volatility and Sony Pictures’ announcement of plans to make its own “James Bond” movies. Several Wall Streeters said the questions about James Bond, one of MGM’s most profitable franchises, had an impact on investors.

MGM, which is still restricted from discussing the offering, did not return calls seeking comment.

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