Digger
06-27-2003, 01:50 PM
LOS ANGELES (CBS.MW) -- Some see Metro-Goldwyn-Mayer as the dark horse in the bidding for Vivendi Universal's U.S. assets, but it may be the horse that most needs to win.
MGM's (MGM: news, chart) executives long to broaden the scope and power of what has been an also-ran among Hollywood studios. Seeking to be more than just a moviemaking operation, MGM has made no secret of its dream to become part of a more "vertically integrated" company with assets in multiple media.
Analysts say MGM has to make an acquisition or face the possibility of becoming a takeover target itself because it's not large enough on its own to compete with major studios.
"I think they understand they're in a tough position. They'd be better off being part of a vertically integrated media company," said Michael Gallant, analyst with CIBC WorldMarkets. "This could be viewed as a last-ditch attempt."
An MGM spokesperson declined to comment for this report.
At the very least, the chance to buy Vivendi represents a key opportunity for MGM to quickly become a major player.
Its status among the bidders for Vivendi (V: news, chart) could be rising. The company reportedly made an $11 billion bid for Vivendi's movie studios, theme parks, games unit and cable and television operations. The bid did not include Vivendi's music operations.
MGM, however, would make a bid for the industry-leading Universal Music Group if Vivendi so desired, according to a report in the New York Times. See Times story.
Flexible bid
The Times said the key to MGM's bid may be the flexibility it gives Vivendi, offering to let Vivendi retain a 20 percent stake in the new company or cash out after the merger. Other bids require Vivendi to retain a 30 percent stake.
Other bidders include Liberty Media (L: news, chart) , a group led by former Universal chief Edgar Bronfman, and another consortium headed by Los Angeles oil billionaire Marvin Davis.
General Electric's (GE: news, chart) NBC unit has submitted a letter of interest, and Viacom (VIA: news, chart) (VIA.B: news, chart) reportedly re-entered the contest Thursday for Vivendi's cable and television assets. (Viacom is an investor in MarketWatch.com, publisher of this report.)
MGM's "dark horse" status may be due to the fact it hasn't made much of a splash in Hollywood recently. When it has, it has often been for the wrong reasons.
Last year, MGM had three major flops, the $100 million "Windtalkers," "Rollerball" and "Hart's War."
MGM's precarious position
The failure of "Windtalkers" highlighted MGM's heavy reliance on its movie business. When the war film starring Nicolas Cage faltered in its first weekend, MGM had to lower its earnings estimates. Larger, more diversified companies generally don't take a large hit to earnings because of one film's failure.
MGM has lagged at or near the bottom of the rankings in per-movie revenue. MGM's average take per-picture in 2002 was less than $20 million, although the studio has made less expensive films lately.
Because it doesn't have the clout of a Universal, Warner or Sony, MGM usually doesn't get its pick of top scripts. Thus, a potential blockbuster such as "Spider-Man" or "The Hulk" usually ends up in the hands of another studio.
Universal has one of the best-run film studios around. The company consistently puts out $100 million-plus films and is currently on a roll with "Bruce Almighty," "2 Fast 2 Furious" and "Hulk."
MGM has been trying to diversify by jumping into cable television and capitalizing on its 4,100-title film library. It has been able to reduce its reliance on films for revenue.
A merger with Universal has a number of advantages for both companies, said Robert Routh, analyst for Natexis Bleichroeder. Combining MGM's vast library from its decades of filmmaking with a formidable Universal cache of pictures could help it to dominate the industry in sales.
MGM also doesn't have the studio backlot Universal does, so there wouldn't be overlap in facilities. Merging distribution operations and corporate staff could cut costs. The combined company could save $300 million to $400 million, Routh said.
"The only bid that simplifies the story is the MGM bid," Routh said. "It's the only publicly traded stock that's a pure-play studio."
Routh points out that Bronfman and Davis would have to get an operation up and running to manage the Vivendi assets, as would Malone, who has little studio experience.
He acknowledges that Malone may have more clout, as does NBC, but MGM is virtually debt-free and would have little trouble producing the cash needed for the deal.
Eat or be eaten
If MGM isn't able to close a deal, it is possible that another company will come in to acquire the company. Routh said a possible suitor might be Sony Corp.'s (SNE: news, chart) Columbia-Tri-Star film division. Sony is in need of the broad film library that MGM offers in order to capitalize on the growing DVD market.
Because MGM is virtually debt-free, the company could sell off some assets, go private and then put itself up for sale on the private markets, Routh said.
MGM was rumored to be up for sale in early 2002, but CEO Alex Yemenidjian discounted that talk. In early 2003, MGM's largest shareholder, Kirk Kerkorian's Tracinda Corp., announced plans to sell 25 million shares.
Kerkorian said at the time he was making the sale for tax purposes, which seemed to bear itself out, given that he now is willing to finance a deal for Vivendi.
Routh says that indicated MGM shouldn't be counted out of the running. "They have the financial wherewithal to do pretty much what they want," he said.
Vivendi's board is scheduled to meet Tuesday in Paris to review the bids.
Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.
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I think, based on this, that MGM is a dark horse to come out the winner unless they wre willing to put up a great deal of cash. Typically deals like this are a combination of cash and stock. MGM's stock has not been performing well. If I were the board of Vivendi I would not like to be taking too much in stock from a company that has not been performing well. What looks like 11 Billion now could quickly turn into 8 or 9 Billion if MGM's stock continues to fall and their management of Universal studios causes that stock to fall as well. Vivendi would be best to go with a bidder who is willing to either put up more cash or whose stock is doing well.
On another front, the bid from Edgar Bronfman may be troublesome too. In stories I have read it was stated that Cablevision was going to be part of the Bronfman consortium. However, Cablevision now seems to be having toubles because of "accounting irregularities". Gee, where have we heard that before.
MGM's (MGM: news, chart) executives long to broaden the scope and power of what has been an also-ran among Hollywood studios. Seeking to be more than just a moviemaking operation, MGM has made no secret of its dream to become part of a more "vertically integrated" company with assets in multiple media.
Analysts say MGM has to make an acquisition or face the possibility of becoming a takeover target itself because it's not large enough on its own to compete with major studios.
"I think they understand they're in a tough position. They'd be better off being part of a vertically integrated media company," said Michael Gallant, analyst with CIBC WorldMarkets. "This could be viewed as a last-ditch attempt."
An MGM spokesperson declined to comment for this report.
At the very least, the chance to buy Vivendi represents a key opportunity for MGM to quickly become a major player.
Its status among the bidders for Vivendi (V: news, chart) could be rising. The company reportedly made an $11 billion bid for Vivendi's movie studios, theme parks, games unit and cable and television operations. The bid did not include Vivendi's music operations.
MGM, however, would make a bid for the industry-leading Universal Music Group if Vivendi so desired, according to a report in the New York Times. See Times story.
Flexible bid
The Times said the key to MGM's bid may be the flexibility it gives Vivendi, offering to let Vivendi retain a 20 percent stake in the new company or cash out after the merger. Other bids require Vivendi to retain a 30 percent stake.
Other bidders include Liberty Media (L: news, chart) , a group led by former Universal chief Edgar Bronfman, and another consortium headed by Los Angeles oil billionaire Marvin Davis.
General Electric's (GE: news, chart) NBC unit has submitted a letter of interest, and Viacom (VIA: news, chart) (VIA.B: news, chart) reportedly re-entered the contest Thursday for Vivendi's cable and television assets. (Viacom is an investor in MarketWatch.com, publisher of this report.)
MGM's "dark horse" status may be due to the fact it hasn't made much of a splash in Hollywood recently. When it has, it has often been for the wrong reasons.
Last year, MGM had three major flops, the $100 million "Windtalkers," "Rollerball" and "Hart's War."
MGM's precarious position
The failure of "Windtalkers" highlighted MGM's heavy reliance on its movie business. When the war film starring Nicolas Cage faltered in its first weekend, MGM had to lower its earnings estimates. Larger, more diversified companies generally don't take a large hit to earnings because of one film's failure.
MGM has lagged at or near the bottom of the rankings in per-movie revenue. MGM's average take per-picture in 2002 was less than $20 million, although the studio has made less expensive films lately.
Because it doesn't have the clout of a Universal, Warner or Sony, MGM usually doesn't get its pick of top scripts. Thus, a potential blockbuster such as "Spider-Man" or "The Hulk" usually ends up in the hands of another studio.
Universal has one of the best-run film studios around. The company consistently puts out $100 million-plus films and is currently on a roll with "Bruce Almighty," "2 Fast 2 Furious" and "Hulk."
MGM has been trying to diversify by jumping into cable television and capitalizing on its 4,100-title film library. It has been able to reduce its reliance on films for revenue.
A merger with Universal has a number of advantages for both companies, said Robert Routh, analyst for Natexis Bleichroeder. Combining MGM's vast library from its decades of filmmaking with a formidable Universal cache of pictures could help it to dominate the industry in sales.
MGM also doesn't have the studio backlot Universal does, so there wouldn't be overlap in facilities. Merging distribution operations and corporate staff could cut costs. The combined company could save $300 million to $400 million, Routh said.
"The only bid that simplifies the story is the MGM bid," Routh said. "It's the only publicly traded stock that's a pure-play studio."
Routh points out that Bronfman and Davis would have to get an operation up and running to manage the Vivendi assets, as would Malone, who has little studio experience.
He acknowledges that Malone may have more clout, as does NBC, but MGM is virtually debt-free and would have little trouble producing the cash needed for the deal.
Eat or be eaten
If MGM isn't able to close a deal, it is possible that another company will come in to acquire the company. Routh said a possible suitor might be Sony Corp.'s (SNE: news, chart) Columbia-Tri-Star film division. Sony is in need of the broad film library that MGM offers in order to capitalize on the growing DVD market.
Because MGM is virtually debt-free, the company could sell off some assets, go private and then put itself up for sale on the private markets, Routh said.
MGM was rumored to be up for sale in early 2002, but CEO Alex Yemenidjian discounted that talk. In early 2003, MGM's largest shareholder, Kirk Kerkorian's Tracinda Corp., announced plans to sell 25 million shares.
Kerkorian said at the time he was making the sale for tax purposes, which seemed to bear itself out, given that he now is willing to finance a deal for Vivendi.
Routh says that indicated MGM shouldn't be counted out of the running. "They have the financial wherewithal to do pretty much what they want," he said.
Vivendi's board is scheduled to meet Tuesday in Paris to review the bids.
Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.
************************
I think, based on this, that MGM is a dark horse to come out the winner unless they wre willing to put up a great deal of cash. Typically deals like this are a combination of cash and stock. MGM's stock has not been performing well. If I were the board of Vivendi I would not like to be taking too much in stock from a company that has not been performing well. What looks like 11 Billion now could quickly turn into 8 or 9 Billion if MGM's stock continues to fall and their management of Universal studios causes that stock to fall as well. Vivendi would be best to go with a bidder who is willing to either put up more cash or whose stock is doing well.
On another front, the bid from Edgar Bronfman may be troublesome too. In stories I have read it was stated that Cablevision was going to be part of the Bronfman consortium. However, Cablevision now seems to be having toubles because of "accounting irregularities". Gee, where have we heard that before.