MGM potential partner for Viacom?

[Dominar of Action]

In preparing the Operation Schmooze MGM thread (see CS forum), I came across the following description of MGM that might be helpful to knowing our audience. Note particularly that just in the past month, they've sold all of their US channels. It would seem from the description that they might be interested in selling off the networks, should they win the auction:

"Metro-Goldwyn-Mayer Inc. (MGM) is engaged in the development and worldwide production and distribution of entertainment products, including theatrical motion pictures, television programming, home video, interactive media, music and licensed merchandise. The Company's principal subsidiaries are Metro-Goldwyn-Mayer Studios Inc., United Artists Corporation, United Artists Films Inc. and Orion Pictures Corporation. Its library contains approximately 4,000 theatrically released feature film titles and over 10,200 television episodes. MGM also has a collection of post-1948 feature films. In addition, through MGM Networks, the Company owns a 20% equity interest in three of Rainbow Media's national cable networks, American Movie Classics, The Independent Film Channel and WE (Women's Entertainment). In July 2003, the Company sold its interest in the three networks to Cablevision Systems Corporation. Internationally, MGM has ownership interests in television channels in more than 90 countries."

[vhsiv]

Dominar -

I saw that item earlier, and I was under the impression that they sold their network interests in order to raise capital for the Vivendi bid.

And actually, it made me worry a bit about the future of IFC, given that up until now it's been a great channel for semi-obscure film buffs like myself. I don't know enough about the other partners (Cablevision) and their commitment to the high standard that the channel has maintained up 'til now. (Unlike their other channel, AMC, which took a nose-dive late last year, when they started up with the commercials.)

I think it's too early to tell what MGM is going to do if they get the Vivendi holdings, but I'm highly guarded if they do: They're likely to place their own productions (SG-1, Stargate: Atlantis, Poltergeist:The Legacy, The Outer Limits) ahead of any incentives for Henson/Farscape. After all, they have a whole library of this stuff just sitting around, and large segements of their production house are already devoted to it - why should they see fit to buck the 'vertical integration' trend?

Time would be better spent on gravy-appeals to Liberty Media.

[Dominar of Action]

I hear you vhsiv, but I personally doubt whether Liberty's still got the same appetite to win the auction that it had before, given S&P's threat to downgrade their rating.

[vhsiv]

Dominar -

My understanding that the S&P threat had been in place for some time - the immediate question was what are they going to do to avoid foreclosure? Many people thought that the Vivendi auction was the answer to their prayers, but then they turned around and mortgaged a portiion of their souls to purchase QVC from Comcast.

The real q. remains - does the QVC purchase place them outside of the threatened 'junk bond' status, or do they still have to assume control over a larger company?

I suppose I ought to have done the research, but I really don't care a whit about QVC...

(It seems that the Vivendi auction has been the 'cover' for a lot of smaller deals - the MGM deal, the QVC deal... it's allowed for a lot of reorganization outside of the spotlight.)

[MediaSavant]

Originally posted by vhsiv
[BI think it's too early to tell what MGM is going to do if they get the Vivendi holdings, but I'm highly guarded if they do: They're likely to place their own productions (SG-1, Stargate: Atlantis, Poltergeist:The Legacy, The Outer Limits) ahead of any incentives for Henson/Farscape. After all, they have a whole library of this stuff just sitting around, and large segements of their production house are already devoted to it - why should they see fit to buck the 'vertical integration' trend?
[/B]

The same thing can be said about Viacom, who would have preference for Paramount-produced stuff. And Viacom is totally committed to "vertical integration".

Frankly, this is a concern no matter who owns the network. Currently, Universal product is preferred and that would be the case as long as the network is linked to them.

If Viacom owns them, Paramount moves into Universal's place.

If MGM is involve, their studios move in.

As long as Henson is not owned by either Universal, MGM, or Viacom, it's all the same as far as Farscape is concerned.

[Digger]

My understanding that the S&P threat had been in place for some time - the immediate question was what are they going to do to avoid foreclosure?
There is no risk of "foreclosure". Liberty Media is actually in pretty good financial shape right now. The S&P threat would only come into play if they bid (and paid) some $11-$12 Billion for Vivendi. Why? Because they would have to sacrifice much, if not all, of their liquidity (they have about that much left in cash and marketable securities - like the 20% stake they have in Barry Diller's company) in order to do this deal. Their other option if they went it alone would be to debt finance the deal, and becuase they basically just debt financed $8 Billion for QVC that would put them right where Vivendi was a year ago. Standard and Poors wouldn't look too kindly on that.

So methinks (and I could be wrong) that Liberty might need a little help to do this deal on top of the QVC deal. Who would that help come from? Barry Diller? Viacom? It's anybody's guess. The fact that Liberty went ahead with the QVC deal and comprimised their position in the VUE bidding must be killing the PTB at Vivendi. They wanted Malone and all his cash to be hovering over the auction, driving up the price. Now that may not happen.

[Dominar of Action]

My understanding that the S&P threat had been in place for some time - the immediate question was what are they going to do to avoid foreclosure? Many people thought that the Vivendi auction was the answer to their prayers, but then they turned around and mortgaged a portiion of their souls to purchase QVC from Comcast.

The real q. remains - does the QVC purchase place them outside of the threatened 'junk bond' status, or do they still have to assume control over a larger company?I think you're confusing Liberty's desire to avoid classification as an investment company with S&P's recent comment that it was considering downgrading Liberty's rating. The two are entirely different issues. Liberty wants to invest its cash in operating assets because there are all sorts of undesirable tax consequences (and consequently, the market valuation of its shares would suffer) if it were deemed to hold too many non-operating assets, as would be the case if it just held minority stakes in lots and lots of companies. Taking control of QVC is a step in that direction. Taking over the VUE assets would be another. However, in trying to acquire both to avoid the investment company problem, it may be creating another for itself by stretching its pocketbook too thinly. This is where the S&P junk bond threat comes in.

As Digger pointed out, junk bond status is a reflection of Liberty's future ability to withstand liquidity demands and its greater exposure to fluctuations in the economy. It simply indicates that investing in Liberty is riskier. It's like, if I were to empty out my checking account this month, I may need to dip into the equity on my house to pay my bills next month, but dipping into equity is both more expensive (in transaction costs and interest payable) and dangerous (if the value of the house goes down, I could end up owing more than the house is worth). Also, I can't access the equity immediately (assuming I don't have a revolving line of credit). If I have an unexpected expense come up, I won't be able to pay it.

As a shareholder, I am only entitled to whatever's left after all the corporation's debts are paid. If the corporation is carrying a lot of debt and the value of the assets goes down, I'm left holding the bag. Therefore, I would be less likely to invest in an over-leveraged company.

(I'm no finance major, so if I've misstated anything, I hope someone (Digger?) will let me know :) )