Polygram a billion-dollar baby

Upcoming PFE auction could be a heated affair

NEW YORK — A rock-bottom financial analysis of Polygram Filmed Entertainment’s assets show that the company is easily worth more than $1 billion and probably significantly more, say people with knowledge of its internal finances.

That suggests the upcoming auction of Polygram Film could be a heated affair. Potential buyers such as Canal Plus have already started to try to talk the price down to as low as $500 million.

Internal financial information shows that Polygram’s film library alone is worth conservatively $650 million, based on its annual cash flow estimated at between $60 million and $70 million, while unreleased and newly released pics are likely worth $250 million, sources said.

Other assets include Polygram’s interest in the Sundance Channel and two small TV production businesses, likely to be worth collectively at least another $150 million.

This analysis puts no value on Polygram’s distribution system or its collection of talent relationships, which some buyers could value at several hundred million dollars more.

Put into play

PFE was put on the market about 10 days ago when Seagram agreed to acquire Polygram Holdings, simultaneously saying it would sell the film division. Goldman Sachs has been retained to advise a divestiture committee repping Seagram, Polygram’s current owner Philips Electronics and Polygram Film, while Societe Generale Bannon is advising Polygram.

PFE CEO Michael Kuhn is working on a management buyout to keep the film division intact, hoping to attract strategic investors to back the purchase.

Polygram declined comment on the financial analysis while Societe Generale Bannon and Goldman Sachs did not return calls.

The value of the film division has become a hotly contested issue in recent days since Canal Plus CEO Pierre Lescure told his company’s annual meeting Thursday that while he is interested in backing Kuhn’s buyout, “it is not even imaginable to start negotiations at the current price” which most observers have put at about $1 billion.

“If the price came down to a more reasonable level we could be interested,” Lescure added.

Investment bankers say there is little interest in the U.S. in PFE at the $1 billion price either, and bankers say the real value is closer to $600 million.

Internal financial information suggests Seagram would not sell PFE at that price, however.

Library science

Polygram’s 1,500-title film library generates an estimated $60 million to $70 million in cash flow before overhead. (Cash flow is earnings before interest, taxes, depreciation and amortization).

As most libraries are valued at 10 times cash flow, that suggests it could be worth $650 million for a buyer that could eliminate the overhead by incorporating the library into its existing catalog.

Additionally, sources say Polygram has an estimated $300 million in revenues coming due from various post-theatrical distribution windows on a group of about 20 recently released pics ranging from “Dead Man Walking” and “Fargo” to “The Game” and “The Big Lebowski.”

Polygram also has in the can about one dozen pics to be released in the next year. The company has an investment of about $200 million in these films, although revenue on the films is highly uncertain.

Conjecture happens

But even if some of the pics do badly, the overall group – which includes “Force Majeure,” “Notting Hill” and “What Dreams May Come” – will likely at least recoup their cost.

Offsetting the total of $500 million that could be assumed will come in over the next year is the $250 million owed on Polygram’s film financing facility with Sumitomo.

Additionally, Polygram has some smaller assets of less certain value. It has about one-third of the Sundance Channel, which sources say will start making money this month. Polygram’s interest is likely worth more than $50 million, sources said.

The company also has two small video production businesses which both make money. One, which is part of Propaganda, is a music video and TV commercial business that has revenues of about $90 million a year and is profitable.

The second is a specialty nonmusic video business with annual revenue of $100 million to $150 million. The value of these two businesses is likely to be roughly $100 million.

Polygram will likely argue that the value of PFE is higher than $1 billion because of the international distribution system, which has people on the ground around the world, and the ongoing nature of the business.

Sources say the distribution system, set up in the past couple of years, has an overhead significantly less than that of the major U.S. studios.

Polygram will also note that PFE won’t suffer from the problem that affected Metro-Goldwyn-Mayer in its 1996 sale – production at MGM was shut down from the time Credit Lyonnais’ affiliate CDR put the Lion on the market until after the sale.