Lion tryin' again
Kirk and Time Warner play library card
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TW kicked tires at the Kirk Kerkorian-controlled studio as recently as a year ago. Those conversations were recently resurrected in talks considered preliminary but serious.
Reps for the Lion and TW declined comment, and Warner Bros. brass denied their involvement in any formal negotiations. But however informal the discussions, one fact is clear: A TW-Lion merger would be a natural fit.
MGM's chief asset is its 4,000-plus movie library, and that's been the chief attraction over the years in talks of prospective deals with various other Hollywood studios.
But nobody in town knows that film catalog like Warners.
Warners distribbed MGM homevideo titles for several years until 1999, when the Lion took operations inhouse. That leaves Warners uniquely situated to project future library income at a time when DVD revenue has begun outpacing theatrical revenue as a cash cow.
But if Warners' knowledge of the MGM library helps TW, it also helps Kerkorian and MGM.
"The worst thing is to be negotiating with a party that's ignorant about your asset," observes one veteran of past Hollywood mergers. "That can be a nightmare because they don't realize what it's worth."
Meanwhile, a TW-MGM tie-up would restore the MGM/UA film library to a single corporate home. TW currently owns pre-1985 MGM titles as part of its acquisition of Turner in the mid-1990s.
TW execs last scrutinized the Lion in 2002 when its asking price was around $7 billion. The price was widely considered a starting point in Kerkorian's talks with several studios at the time, but TW was in no shape then to conclude an acquisition of that magnitude.
Fast forward to Richard Parsons and TW, circa December 2003.
TW chairman Parsons recently signaled the conglom's interest in turning acquisitive following an agreement to dump music operations. And while other TW acquisition targets abound -- Cablevision would make a nice fit with its cable operations, for instance --Leo the Lion reps a pet TW target.
However, an eventual deal could take other forms than an out-and-out acquisition by TW: MGM's production unit could, for example, be folded into the conglom as a New Line-like mini-studio of its own.
Kerkorian regained control of MGM in 1996 after having acquired and sold the studio twice in previous decades. Over the past couple years, there have been repeated signs the press-shy billionaire considered his latest Lion investment to have maxed out, but he thus far has been unable to identify a clear exit strategy.
A first task in discussions of a Warners-MGM tie-up would be to determine whether execs of the two studios are in the same ball park in assigning valuations to their respective assets. That could prove nettlesome, but MGM is currently valued in a range that would at least make a deal feasible.
Kerkorian has acquired his 73% stake in the company for an average share price of $15, but he probably wouldn't want to sell his holdings for less than $17 a share to cover so-called carrying costs on the holdings - the costs of tying up his funds for the past five years.
MGM's stock has lately been trading between $16-$17, ever since the company said it would stage a Dutch auction to buy back 10 million shares for up to $18 a share.
The move -- which the company said aimed to return some surplus cash to shareholders following a failed bid for Vivendi Universal Entertainment - also had the effect of bolstering long-languishing Lion shares.
Just last week MGM chairman-CEO Alex Yemenidjian told reporters at an investors confab the Lion would only consider an all-out merger rather than cherry-picking individual assets, which are all too expensive at this point. He was not suggesting, however, that any specific negotiations were ongoing.
Bankers say MGM's massive movie library itself is worth about $18 a share. With 245 million shares outstanding, that would translate into a cash price of $4.4 billion.
However, one problem in some past merger talks - including abortive preliminary negotiations with DreamWorks a couple years back - involved the financial community's inclination toward plugging in a negative "goodwill value" to any overall MGM valuation.
The Lion's checkered record in theatrical releases has prompted prospective marriage partners to place a value on MGM a bit lower than what its massive library would merit.
But the studio has been performing better of late, and that may be another plus in putting the stars in alignment above Kerkorian's latest "for sale" sign.
