Street uncertain as company looks to go public again
MGM, the fabled studio that’s made some folks piles of money and cost others their shirts, is heading back to the stock market — news that left potential investors seeking clarity on MGM strategy beyond several big films and a TV library that may be mostly spoken for.
“If they really want to get back into the ranks of the major studios, they’re going to need a huge infusion of capital and a rather ambitious production and distribution plan,” said Larry Ulman, a partner at Gibson Dunn who specializes in entertainment finance. Gibson Dunn worked on MGM’s last IPO, which raised more than $300 million in 1997. IPO proceeds, he said, could help MGM ramp up its slate, churning out the quality and perhaps quantity of pics that could put the Lion back on top. “If you were just going to continue to release a ‘Bond’ film and maybe a ‘Hobbit,’ it wouldn’t make sense to go through all of that,” he said.
There are likely to be more questions than answers for a while as MGM is the first entertainment company to pursue an IPO under new legislation effective in April that allows companies with under $1 billion in revenue to keep the process confidential until 21 days before a roadshow. Part of the JOBS Act (Jumpstart Our Business Startups), the legislation reduces public scrutiny and keeps key operating stats out of the hands of competitors for much of the IPO process.
The company is said to have hired Goldman Sachs as lead underwriter.
News of the move, which came only two years after a bankrupt Lion risked closing up shop altogether, surprised Hollywood and Wall Street.
“What does the capital structure look like? What revenue does the library generate? That’s always been the story at MGM,” said Alan Gould of Evercore Partners. “How much of the library has already been exploited, with long-term SVOD deals? Is there more value to come? How much cash is about to come in vs. how much came in upfront?”
MGM reported net income of about $38 million on $699 million in revenue for 2011. Total operating expenses were $400 million. Distribution and marketing expense was $91 million.
The studio earned $22 million last year from its stake in Epix, the pay TV network it owns with Paramount and Lionsgate.
MGM execs, through a spokeswoman, declined to comment beyond a one-sentence press release noting that it “submitted a draft registration statement on a confidential basis to the U.S. Securities and Exchange Commission for a possible initial public offering of its Class A common stock.”
An IPO was considered likely after the studio emerged from bankruptcy with new owners and led by co-chairs Gary Barber and Roger Birnbaum, but it wasn’t expected so soon. The Lion, however, needs coin, and industry insiders said the IPO’s probably timed to coincide with the December release of Peter Jackson’s highly anticipated “The Hobbit: An Unexpected Journey.” A second “Hobbit” installment is due in 2013.
MGM exited bankruptcy last year with a restructuring that wiped nearly $5 billion of debt off its books with the hope of putting the company on a path to profitability.
The bankruptcy was a disaster for the consortium that had acquired the studio for top dollar in 2004 from Kirk Kerkorian only to see DVD sales plummet industrywide. Buyers included private equity firms Providence, Texas Pacific Group, DLJ Merchant Bankers, Sony Corp. and Comcast.
The investment firms lost every dime they put in the company and were horrified by the debacle, as were many bondholders. Some Wall Streeters said that could dampen enthusiasm for an IPO.
MGM’s single biggest shareholders now are funds Anchorage Capital, Highland Capital and Icahn Capital — which swapped their debt holdings in MGM for equity during the Chapter 11 restructuring. Icahn, who’s made headlines as an activist investor targeting takeovers at Lionsgate, Blockbuster and Time Warner, always ads spice to the game, one media banker noted Wednesday.
MGM’s board of directors includes former Fox exec Peter Liguori, Ann Mather, James Dondero, Jason Hirschhorn, Christopher Pucillo, Fredric Reynolds and Kevin Ulrich, along with Barber and Birnbaum.
Bank markets have reacted positively to the company’s revamp. In a sign of its health, MGM restructured half a billion dollars in February, converting part of an outstanding loan into a revolving credit facility. And earlier this year, ratings agency Moody’s Investors Service upgraded MGM’s debt rating, likely boosting the Lion’s appeal to potential lenders.
Lenders are particularly keen on “The Hobbit” franchise and James Bond film “Skyfall” in the works, as well as MGM’s increased television revenue under new toppers. The company said it posted worldwide TV licensing revenue of $397 million last year.
IPOs are tough for stand-alone film and TV production outfits since Wall Street likes the steady returns produced by diversified media congloms. The film biz is particularly tricky because releases are front-loaded with marketing and production costs, so even the most boffo pics can show losses in their first weeks of release. Offsetting those losses requires a steady string of winners in a notoriously hit or miss biz.
Brian Grazer and Ron Howard’s Imagine Entertainment was publicly traded from 1986-93 before the duo took it private. Pixar and DreamWorks Animation had more luck when they launched their IPOs in 1995 and 2004, respectively. DWA raised $812 million when it went public right after the release of franchise installment “Shrek 2” and just before the company started raking in cash from the pic’s DVD sales. Pixar went public a week after the release of its debut pic “Toy Story.” The move raised $140 million n the largest IPO that year.
The question for potential MGM investors is what kind of company will the Lion be over the long haul. “It’s not really a studio anymore, just a collection of rights,” said one Hollywood exec. That’s a widely held view, and it’s up to MGM’s new toppers to convince Wall Streeters otherwise.
The studio’s other recent film projects include Sony’s “The Girl With the Dragon Tattoo,” which generated a “modest” loss for MGM, Barber said in March. He said MGM was talking with Sony about co-financing a sequel based on the second book in the “Millennium” trilogy by author Stieg Larsson. MGM also co-financed “21 Jump Street” with Sony.
The Lion’s co-financing slate also includes “Hope Springs,” coming this summer; Bond pic “Skyfall” hits in November followed by “Hobbit” in December, “Hansel and Gretel: Witch Hunters” in January and “G.I. Joe: Retaliation” in March.