MGM tumbles

As sale talks cool, so too does Lion's stock

After last week’s news that Kirk Kerkorian might make a quick sale of Metro-Goldwyn-Mayer, the expectations of that sale have subsided, dragging the stock prices down with them. MGM stock fell $1.25 Wednesday to close at $15.81, near its 52-week low.

Wednesday’s price is 34% below what Kerkorian paid two years ago when he bought the studio — for the third time — for $1.3 billion.

The company’s stock had jumped sharply after MGM revealed in an Aug. 5 Securities & Exchange Commission filing that it was in “informal discussions with unidentified companies” — believed to be Walt Disney Co. and News Corp. — about a possible sale. Insiders said the discussions were initiated by Kerkorian’s right hand man, Jerry York.

How serious Kerkorian was about selling is not clear, but the timing raised eyebrows. Industry execs said no one was likely to offer Kerkorian anywhere near what he paid for the Lion.

“He has no chance of recovering the equity out of the business. There are serious problems with the valuation on that business,” said one person close to the situation.

Some suggest Kerkorian was not looking to sell outright but was hoping to find a merger partner to shore up MGM’s balance sheet and improve its strategic position.

One person in the know said Kerkorian has plenty of cash and doesn’t want more. He just sold $980 million of stock in Chrysler for tax reasons but retains $4 billion of Chrysler stock.

Partner Seven Net

Wall Streeters said the impetus for putting MGM into play came largely from Kerkorian’s partner in the deal, Seven Network of Australia, which has its own problems and won’t take up its rights in MGM’s recently announced $250 million stock offering.

Seven is under its own pressure from Australian investors to get out of the investment. But a Seven spokesman said the company was “very comfortable with the investment,” although he declined comment on the merger talks.

MGM execs were not able to comment because of an SEC-mandated “quiet period.” Kerkorian’s reps did not return calls. Disney declined comment, while News Corp. has denied it is in any “conversations” with MGM.

Kerkorian may be simply fed up with MGM’s insatiable need for cash. Indeed his approach to potential buyers coincided with a looming cash crunch at the Lion that has prompted the company to freeze TV development, cut back the number of pics it planned to release annually and undertake the stock offering.

Seven’s unwillingness to commit more money means Kerkorian has to fund 90% of the stock offering (to maintain his 65% stake and the 25% stake of Seven Network).

Needs cash

And MGM’s own admissions in the SEC filing suggest it will need further cash injections. Even after taking into account the $250 million in new equity, MGM warns that, until the end of next year, there will be times it has less than $20 million available in credit on its $1.3 billion bank line. And this assumes its pics perform as projected — if not, its liquidity will be even tighter.

Whatever the reasons for talking about a sale, Kerkorian’s approaches will aggravate difficulties faced by MGM chairman Frank Mancuso Sr. as he attempts to rebuild the company and make it a viable place for talent.

Many of Hollywood’s producers and agents say that MGM is hampered by its inability to access top-notch talent and material, forcing it to release pics that bomb, such as “Dirty Work.”

MGM’s financial tensions have been exacerbated by the studio’s lack of consistency and management missteps:

  • It has an image problem. Although MGM reaps some benefit from its underdog status, the studio is seen as anonymous and passive, making it hard for agents and producers to get a bead on what they might want.

  • Aside from James Bond, MGM owns no lucrative franchises, and it can boast of few relationships with top stars or directors that provide it with top pics.

  • Although MGM now says it is willing to do co-productions and split-rights deals, it has been hesitant in recent years to seek out foreign partners.

  • MGM tends to overpay for projects because studio execs suddenly decide they need to make a splash or are in a rush to appear viable. More than other studios, MGM accelerated film production in the first half of this year in anticipation of a Screen Actors Guild strike, which never happened.

    By the end of July, MGM had completed principal photography on nine pics, leaving the company short of cash for marketing and future productions.

  • MGM’s freeze on television development, announced last week (Daily Variety, Aug. 6), poses questions about its long-term commitment to TV. The freeze comes just one year after MGM re-entered the network TV business after a six-year hiatus.

Ironically, MGM’s financial crunch was in part a result of the TV division’s prolific production slate. With 10 series receiving commitments ranging from 13 to 44 episodes, MGM could not afford to deficit finance any more projects.

Banking insiders say the company’s lenders are upset that initial projections of MGM’s cash needs have proved wrong and that the company’s $1.3 billion credit line has proven inadequate to finance the biz plan.

Almost half of that credit line is debt from the acquisition, however. MGM only has a $600 million revolving credit line to fund its operations.

According to one former executive, MGM should have had “a billion dollars in the bank to be competitive … they needed money big enough to have their average budgets in line with other studios and to withstand bad times like they’re having now. They’ve never been able to spend the way they should have.”

Write-offs

While some pics like the 1997 James Bond installment “Tomorrow Never Dies” have made nice profits, plenty more have lost money: It wrote off $33.6 million in the first six months of this year on pics such as “Species 2” and “Dirty Work.” Film profits after the write-offs tallied $18.1 million, MGM says in SEC filings.

And in areas where it does make money, such as syndie and homevideo, MGM says cash is coming in “more slowly than originally anticipated.”

MGM’s high corporate overhead meant the Lion was bleeding red ink even before it accounted for the increasing interest costs on its debt. As a result, the Lion lost $73 million in the first half.

The Lion will be operating at the edge of its financial resources at least until the end of next year, it warns in SEC filings this week.

Despite MGM’s financial straitjacket, many on Wall Street believe Mancuso has done a reasonable job executing the business plan he outlined during last year’s initial public offering. At the time, MGM said its priorities were to exploit its huge library and to develop distribution channels by “delivering MGM branded programming.”

(Don Groves in Sydney contributed to this story.)

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