Lion fills Fox den

MGM leaving UIP for three-year distrib deal

Metro-Goldwyn-Mayer has inked a three-year international theatrical, video and DVD distrib deal with 20th Century Fox, raising questions about the future of the United Intl. Pictures partnership involving the Lion, Universal Pictures and Paramount Pictures.

In a deal hailed by MGM as a “milestone,” the Lion hopes to save millions of dollars in distribution costs through the new pact. Earlier this year, MGM terminated its long-running and high-cost Warner Bros. video distrib deal at a price of $225 million.

Meanwhile, the Lion is thought to be working on fresh initiatives related to its Internet strategy, which will likely be announced shortly.

MGM said the new video and DVD deal will take effect Feb. 1 after the expiration of the WB deal. The theatrical agreement will kick in on Nov. 1, 2000, following expiration of MGM’s deal with UIP. Both new deals run through to Jan. 31, 2003, making them considerably shorter-term than either the UIP or WB deals.

MGM also revealed that it and Fox had “agreed to jointly explore cable and satellite distribution ventures worldwide.” The Lion has been having discussions about creating MGM-branded cable networks with cable programmers such as Cablevision Systems and Encore Media, but those discussions have so far gone nowhere.

Fox parent company News Corp. has extensive international sat TV ventures in Britain, Latin America and Asia as well as some cable nets in the U.S.

Lion’s pride over Fox

MGM execs were exultant about the Fox deal Monday. “MGM has achieved one of its most important strategic goals,” said MGM vice chairman Chris McGurk in a statement, although the company refused to disclose any details about the new deal.

MGM stock rose 43¢ to $16.25 Monday.

“We are delighted to form this strategic alliance with MGM,” Fox Entertainment Group president Peter Chernin said in a statement.

Since it was reacquired by billionaire Kirk Kerkorian in 1996, the Lion has focused on building up its library through acquisitions. It is now looking to cement distribution partnerships, taking advantage of what is now a 5,100-title catalog.

The advantages of the new deal, McGurk told Daily Variety, are that MGM is partnered with “the best in the business,” and the same team would handle both video and theatrical.

Leo gains control

He said MGM had negotiated a number of controls “that from a marketing and distribution standpoint give us about as much control over our product as if we had an equity stake in the distribution company.”

In the WB vid deal, MGM had very little say in how titles were marketed — an aspect of the pact that proved frustrating for the Lion.

McGurk said the new deals would also save MGM significant amounts of money, although he refused to be specific.

Reducing distrib costs

In a voicemail to staff, however, MGM chairman and CEO Alex Yemenidjian said the Lion would save about $15 million in annual distribution costs. Analysts estimated earlier this year that early expiration of the WB vid deal would save the company about $50 million.

McGurk explained that given the cost of running UIP — the Lion ponies up one-third of its expenses — and MGM’s international film rental revenue in the past few years, “you can see that our distribution cost as a percentage of rentals has been quite high. We have significantly reduced that cost.”

McGurk refused to say whether Fox agreed to pay MGM any significant advance to help fund the cost of terminating the WB deal, which was one of the objectives in recent negotiations.

MGM has already announced its intention to raise $500 million in a stock offering, although there was some suggestion that the precise amount to be raised may depend on how the distrib deals were struck.

McGurk said Monday that MGM was “moving forward” with plans for the offering but declined to comment further. Wall Streeters said that given the short term of the deal, MGM may have decided not to seek a big advance.

Lion takes short leap

The short term of the Fox agreement also reflected MGM’s desire not to be hamstrung by long-running distrib deals. A future sale of the Lion could be affected by distrib deals, as possible buyers may not wish to deal with another studio for a long period of time.

The pact gives Fox a good inside look at MGM and its operations, however, which several observers point out could pave the way for an eventual Fox acquisition of the Lion. Fox previously expressed interest in MGM, and insiders said that the distribution deal stemmed from Fox’s interest last year in buying the MGM library.

Fox began discussions with MGM for the international distribution arrangement several months ago, but talks stalled and resumed at various times before the final deal was hammered out this month. Disney, too, made advances toward MGM as a potential strategic partner.

Meanwhile, internal angst continues at the Lion despite recent efforts by MGM’s management to display a new, stable studio for sellers around town.

Shakeup continues

Over the next two weeks, Yemenidjian and McGurk are expected to begin consolidating redundant operations of United Artists and MGM under the latter’s purview. And while last summer the studio made substantial cuts to its work force, sources indicate that several of the company’s operations will be scaled down further, including the TV, merchandising, homevideo, consumer products divisions.

TV staffers are said to be particularly unnerved by the lack of direction they’ve received from MGM’s new management team.

Changes are also expected in theatrical marketing, distribution and production, including the hiring of a production topper for the newly restructured UA, which will now serve as MGM’s specialized arm. It’s understood that MGM brass have courted former New Line distribution/marketing prexy Mitch Goldman for a similar post at the Lion.

Insiders expect many of these changes to come by the end of this month to coincide with the end of the second fiscal quarter on June 30, allowing the new team to start fresh in July.

(Cynthia Littleton and Andrew Hindes contributed to this report.)