Bear down on Lion

Wall St. backer 'neutral' over MGM stock

NEW YORK — In the latest sign of Wall Street’s doubts about the Metro-Goldwyn-Mayer stock offering, one of MGM’s Wall Street backers published research Monday that did not urge investors to buy the stock.

In an extremely unusual decision, Bear Stearns put a “neutral” recommendation on MGM, sources said, which is Wall Street-talk for “avoid.” Bear Stearns was one of four firms that underwrote MGM’s $180 million stock offering last month.

The other three underwriters, Merrill Lynch, J.P. Morgan and Furman Selz, all put “buy” recommendations on the stock Monday, the first day securities laws allowed the firms to publish their research.

Bear’s report, written by analyst Ray Katz, focused on the timing of the offering, according to people who saw it. Katz, who is highly respected on Wall Street, did not return calls seeking comment.

Katz said in the report that the stock, at its current price of around $21, was “six or 12 months ahead of itself,” sources said. The recommendation did not affect MGM’s stock, which rose 75¢ to $21.12.

He said in the report that MGM’s production business would have more visibility in a year’s time. MGM execs told investors on the roadshow preceding the offering that the business plan was based on growth coming from the film library, but it assumes a certain level of new production to replenish the library.

Katz predicted the stock would rise almost 30% within two years, sources said, and added that he may possibly upgrade the stock in six months’ time.

Bear Stearns’ recommendation is sure to upset MGM, which had to contend with the withdrawal of Goldman Sachs from the underwriting team in the lead-up to the offering. Goldman is believed to have had differences with the company over the timing and valuation of the offering.

MGM had to deal with many other difficulties before the offering, such as a volatile market and disinterest from a lot of media investors. As a result, the size of the offering was eventually reduced from 12.5 million shares to 9 million shares, and the stock ended up being sold at the bottom of the predicted pricing range.

Wall Street firms almost always recommend purchase of a stock they have underwritten — both to satisfy the company involved and because the firm’s sales force has already sold the stock to its investor clients.

One investment banker said Bear’s move shows the firm has “research integrity.” Wall Streeters said the recommendation raised questions about decision-making on the investment banking side, however, because Katz made his recommendation when MGM stock was barely above the offering price of $20. Bear Stearns execs did not return calls and an MGM spokesman wasn’t available for comment.

The other underwriters’ reports were much more positive, as is usual in these situations. J.P. Morgan predicted in its report that after losing $111.5 million in 1997, MGM’s red ink would shrink to just $17.2 million on an operating profit of $62 million as a result of profits from the upcoming James Bond release, “Tomorrow Never Dies,” and the film library.

But it will be the year 2000 before MGM turns a profit, Morgan said, assuming a big profit on the next “Bond” pic.

The Morgan report, written by analyst Matt Harrigan, estimated that the MGM library would have earnings before interest, taxes, depreciation and amortization of $150 million next year, rising to $220 million in 2002 as rights revert back. While the estimates in the report are those of the analyst, company management typically reviews estimates before research is published, which suggests the estimates are in line with the company’s own analysis.

Harrigan said the risks to MGM included the “currently congested film release pipeline” and the fact that MGM’s new production may offset the reduction in output from other major studios.

Harrigan also conceded that MGM was “not as integrated as larger competitors,” a concern for some major media investors. He noted Sony Pictures Entertainment’s plans to produce a Bond pic was a risk, although he downplayed its significance. Harrigan estimates the Bond franchise is worth more than $600 million to MGM.

Furman Selz analyst Stewart Halpern said in his report that MGM’s cash flow growth would average more than 25% annually in the next three years, “the highest growth rate of any of the major public entertainment companies.”

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