NEW YORK — MGM is back on the auction block again, and this time, the Lion might actually get its price.
But unlike past big-budget studio buyouts, this deal won’t be about vertical integration, diversification, bragging rights or empire building. It’ll be about the cash — library cash.
Thanks to the recent DVD gold rush and “everyday low prices” at retailers like WalMart, MGM/UA’s 4,000-title library suddenly looks like a golden goose on Viagra; in the vulturous eyes of private equity investors and even to strategic partners like Sony, studios are no longer about making movies but selling them.
That means MGM and Kirk Kerkorian could command one of the highest prices ever paid for a studio whose fortunes have been uneven at best in recent years. (At $20 a share, rumored price equates to about 12 times the value of its library cash flow this year.)
The bad news: In the cruel irony of today’s cost-crazy movie biz, the only way to get top dollar for MGM is to effectively shut it down, leaving Hollywood with one less creative and competitive hub.
“It’s the dimming of the lights and an end of an era, but it came about because production costs got out of control and companies like MGM could not recoup the expense, even with DVD,” says Hal Vogel, author of “Entertainment Industry Economics. ” “Any new owners will simply run it on auto-pilot and milk the library … That’s what this business has come to.”
Make no mistake, this deal is about the catalog, specifically the back-catalog.
As in the late 1980s, when buyers smelled fresh blood in the form of new TV outlets to whom they could sell old movie rights, 21st century investors and the mega-congloms are counting on continued DVD riches.
Traditionally, the bulk of a library’s sales are generated by just the top 10%. Obscure catalog fare is usually just filler for the middle aisles at Blockbuster. But that’s changing.
In a little-noticed trend, more than two-thirds of a studio’s library DVD sales now derive not from blockbuster hits but from older back-catalog titles. According to Adams Media Research, studio grosses from video/DVD grew 16% last year, but most of that growth came from catalog titles.
“Hits predominated the market up until last year,” says AMR prexy Tom Adams, who estimates total new release revenues were up just 2% last year, while DVD sales of catalog feature films leapt 51%. Adams reckons MGM sold $600 million worth of DVDs off its back catalog last year, compared with only $360 million on its new releases.
“The margin on the catalog stuff is huge,” he says, adding that even lesser-known 1950s and ’60s titles might appeal to older consumers — the last to purchase a DVD player.
The DVD boom has been a Hollywood Messiah and Wall Street myth. It salvaged many library deals — such as MGM’s purchase of Orion and Goldwyn — and recharged revenues as overseas TV sales slowed. The MPAA reports that its member studios pulled in nearly $15 billion from worldwide DVD sales last year, a hefty 43% gain over 2002. Even better, DVD sales overseas jumped an astronomical 53% last year to $5.5 billion for 36% of the total haul.
So what will Sony and its private equity backers do with the venerable Lion?
Lever her up, and let her roar.
The fully amortized film library, which is forecast to throw off some $440 million in cash flow this year (a 30% jump over 2003), is the key to financing the deal and justifying the price tag Kerkorian insists the Lion is worth.
Most strategic buyers calculate they can cut $200 million to $300 million in redundant production and costs in an MGM buy. Backers Providence Capital and Texas Pacific love a cash-rich business and are expected to provide most of the coin a nervous corporate buyer like Sony would be loath to risk.
The big unknown is how long the DVD gravy train will run: Will consumers stop buying titles when cheaper versions become available on VOD or the Internet?
But with DVD penetration still only at 50%, most studio execs believe there’s plenty of room to keep repricing and repackaging MGM nuggets such as the James Bond films or the “Pink Panther” series for a new audience.
In the end, a sale of MGM for $5 billion or more would again validate Wall Street’s favorite entertainment business model: New Money for Old Rope.
Private backers like Providence Capital, with their three- to five-year investment horizons, aren’t much worried where the money will come to make the new rope.
“It’s a no-brainer financially that MGM without the studio baggage will look good no matter who owns it,” says one banker.
But the equation might not be that simple.
By most counts, only 1,200 titles of MGM/UA’s 4,000-strong library are real A-list pictures like “Dr. Zhivago” or “Thelma and Louise” — and maybe only 300 or so generate the big DVD bucks, Vogel reckons. The balance is comprised of obscure mid-century chestnuts like “Attack of the Puppet People” and “Donovan’s Brain.”
Still, the company says 50% of its titles were released after 1977 and 77% were released after 1960. And, to date, only 900 titles (some say the best ones) have already been released out of the 4,000 in the vault.
Ultimately, whether or not MGM can rally a bidding war for its venerable name may depend on whether a rival buyer (Time Warner and NBC both kicked the tires previously) truly believes the library can keep making money without being fed by new releases.