Billionaire buys Oz net's MGM stake at original price
NEW YORK — Metro-Goldwyn-Mayer’s majority shareholder Kirk Kerkorian agreed Wednesday to buy Australia’s Seven Network’s 25% stake in the Lion for $389 million, a move likely to end speculation that the 82-year-old billionaire is looking to sell the studio.
The deal, which will lift Kerkorian’s stake in the Lion to 90%, coincided with the MGM board’s approval after a meeting Wednesday morning to double the size of the company’s forthcoming stock offering to $500 million as expected (Daily Variety, Aug. 17).
The two events are good news for the beleaguered studio, stabilizing the company’s ownership and significantly strengthening its balance sheet. MGM’s stock price jumped $2.87 to $18.18 in the wake of the news.
MGM chairman Frank Mancuso said Kerkorian’s willingness to buy Seven out and fund the increased rights offering “demonstrate the tremendous commitment that Kirk Kerkorian and Tracinda have for MGM.”
Tracinda Corp. is Kerkorian’s private company, through which he makes his investments.
Furman Selz analyst Stewart Halpern said the extra money in the enlarged rights offering is “intended to make certain that the company has the full financial resources to continue on its business plan.”
The $500 million offering is designed as a rights offering, which means Kerkorian will finance at least 90% of it. As a result of the offering and buying out Seven, Kerkorian’s total investment in the Lion will double to $1.835 billion. That figure, which represents the largest amount of money Kerkorian has ever had in MGM, still represents only about one-third of his net worth, believed to be at least $6 billion.
And Tracinda Corp. has promised to take up any rights in the offering not taken up by public shareholders, MGM said, so Kerkorian’s stake in the Lion may rise even further after the offering.
Just as importantly, Kerkorian signaled his faith in the value of MGM by agreeing to buy Seven out at its original purchase price of $24 a share, 40% above the recent market price of MGM stock (the stock had traded as low as $14 before rallying after reports that the stock offering would be increased).
Seven and Kerkorian together paid $24 a share, or $1.3 billion, to buy MGM from the French government agency CDR two years ago, although both Kerkorian and Seven put more money into the studio last year when it acquired Orion Pictures. Kerkorian put further money into MGM last November to supplement its initial public offering and has supported the stock by open-market purchases.
Won’t sell soon
Observers said Kerkorian’s willingness to pay such a high price to buy out Seven suggests that the wily mogul isn’t likely to sell any time soon because it is hard to conceive that any buyer would be willing to pay the same price — let alone a higher price — for all or part of the Lion at the moment.
Kerkorian’s reps had approached companies such as News Corp. and Walt Disney Co. in recent weeks about a partial or total sale of the Lion, prompting due diligence investigations into MGM’s finances that continued for several weeks. But those investigations are thought to have effectively ended in the past few days. Neither News Corp. nor Disney would comment Wednesday.
Seven Network chairman Kerry Stokes was believed to have been the prime force behind the approaches. Seven has been under pressure from its own shareholders to exit MGM, and the company had said last month it would not subscribe for its rights in the $250 million stock offering.
Kerkorian’s decision late last week to double the size of the offering to $500 million was apparently the last straw for Seven. The Oz broadcaster’s stake in MGM would have been dramatically diluted by the enlarged offering, and that is thought to have pushed Stokes to ask Kerkorian to buy him out.
In a statement from Tracinda, Stokes said: “We have thoroughly enjoyed our relationship with Kirk Kerkorian and MGM. However, due to economic conditions in our region, we felt that our capital could be much better employed in Australia.”
MGM said last month, when it announced plans for the $250 million offering, that it needed the extra capital because bigger-than-expected investment in television production and losses on film releases had combined to reduce the amount of money available under its $1.3 billion credit line to just $132 million as of July 31.
But the $250 million wasn’t going to last very long. In a Securities and Exchange Commission filing earlier this month, the Lion revealed that the money would be used to repay debt, but the credit line would be drawn down again quickly and, as a result, available credit under the bank facility could be less than $20 million at times over the next year.
Cuts to lift
MGM has yet to amend the filing to reflect the increased offering, but people close to MGM said last week that previously disclosed budget cuts, such as a freeze on television development, would be lifted as a result of the increased offering.
Jim Mahoney, a spokesman for Kerkorian, said the investor’s willingness to put so much more money into MGM shows “he is committed to making this work.”
Wall Streeters were baffled by Kerkorian’s willingness to buy out Seven at a price so far above the current market price, but Mahoney said “that’s the way Kirk is,” noting that Kerkorian bought Seven out at its original investment price which ensured Seven did not lose any money on its two-year investment.
One person close to MGM said Kerkorian had re-established his benchmark view of MGM’s value by paying that price, which was marginally above his average entry price. Knowledgeable persons said Kerkorian would never sell his own stake at less than what he paid.
The extra cash for MGM should tide the Lion through another year or two, by which time the library’s cash flow should be rising significantly as licensing rights on the library titles begin to revert back to the studio.
Furman Selz analyst Stewart Halpern estimates the library’s cash flow — earnings before interest, taxes, depreciation and amortization — will rise by $132 million between 1999 and 2001 as rights revert back to MGM, compared with the library’s estimated 1998 cash flow of about $100 million.