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MGM’s IPO: Not So Fast

Insiders say that company is exploring other options to cash out shareholders, including a private placement

While “The Hobbit: An Unexpected Journey,” and “Skyfall” have dramatically improved MGM’s bottom line, the company’s initial public offering may still be a long ways off.

Knowledgeable sources say the Lion won’t likely launch an IPO any time in the near future. In the meantime, MGM has been exploring other options to help cash out its shareholders.

Among them: Very early discussions of launching a $400 million to $500 million private placement, according to individuals with direct knowledge of the discussions. That trade would allow MGM to give its investors some liquidity, and wouldn’t derail its efforts to go public down the line.

MGM began its IPO process last year, and it’s already allowed the company to gauge the market’s interest in an initial public offering as well as taking the temperature of possible contenders for an acquisition of the studio. Industry observers said MGM’s efforts have made it clear that the current owners — a mix of hedge funds including Anchorage Capital, Solus Alternative Asset Management and Highland Capital — are an unnatural fit for a film studio and are looking for a way to cash out on their investment.

MGM declined to comment on any discussion of a private placement.

Much of what MGM would disclose during an IPO process is also similar to disclosures for a sale process, and some observers have gone so far as to suggest that MGM’s IPO movements could act as a dual-track process — something that would allow the company to either go public or sell. (The company has denied that it is looking to sell.)

Wall Street favors steady, predictable revenue streams for companies looking to go public. That has traditionally posed a challenge for film studios, whose earnings are often quite the opposite: Volatile, unpredictable, and relying on an opaque accounting structure that can be difficult to understand. 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.

“Wall street likes to see steady and very predictable earnings,” said Lindsay Conner, co-chair of the entertainment and media practice at Manatt, Phelps & Phillips. “That’s something that eludes even the most successful film companies because hits may come from films that aren’t necessarily expected to be the key drivers of profit, and there are certain seasons of the year when the film industry is more active and less active. All of that leads to quarterly swings which give Wall Street analysts heartburn.”

MGM’s library of predictable cashflows, the promise of future “Bond” installments and the next two “Hobbit” films will help stabilize the Lion’s stock price should it launch an IPO. But the challenge for film companies is churning out a steady stream of hits to maintain that stock price. While the company is focused on remakes and other known properties (Its next releases are “G.I. Joe: Retaliation,” “Carrie” and “Robocop”), those films aren’t guaranteed hits the way that “Hobbit” and Bond installments would be.

Because of this, investors in MGM will have to put an enterprise value on the rest of the company. That includes the Lion’s television activities, which MGM has pledged to grow.

Investors will also be looking at the Lion’s capital structure, which includes a $650 million credit facility the company refinanced earlier this year. They’ll be interested to see how much of the library has yet to be exploited through SVOD and other deals.

MGM’s 2012 revenue rose 97% in 2012 over the previous year, with adjusted earnings up 48% to $286 million, according to the Lion’s 2012 year-end financial statement issued Monday.

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