The feedback from potential bidders on MGM who were sent financial packages last week: Underwhelmed.
Apparently the documents – which were sent out to about a dozen potential bidders last week – are a lot more vague than might be expected for institutions expected to put up billions of dollars to buy the beleaguered studio.
But there was some important news to be gleaned: MGM’s 4,000–title library, which was believed to throw off $450 million per year, is now producing less than $300 million a year.
That library, – including Bond films, The Pink Panther franchise, "The Thomas Crown Affair" and many others — is by far the studio’s most valuable asset, and the main reason that Time-Warner and News Corp. are interested in buying the debt-saddled company.
But, said one potential bidder: “The numbers are falling off a cliff, library-wise. They’re lousy.”
The reason for the decline is not only the decline of decline of DVD sales, although that must be part of it.
But the dirty secret there is that Fox, which distributes the library, no longer has to guarantee MGM a minimum of $450 million a year in income, and thus has less incentive to push its monetization.
Hence the cliff-dive, and hence the underwhelmed potential bidders.
Update: A knowledgeable insider brings up a fair point in explaining the diminished revenue differently. MGM has virtually stopped making movies, making it hard to continue growing revenue in the library. As this source put it, "You can only go the library well so many times."
Meanwhile, it is expected that about a half-dozen bids will come in for this round by the deadline of January 15.
WaxWord has learned that in addition to Fox, Time-Warner and Lionsgate, the Indian media conglomerate Reliance has allied with Sony and Summit to bid on the studio. Sony, which already had to write off its ill-planned investment in MGM once, is the distribution pipeline for the partnership; Summit would put up some of the cash.
The first round of bids, due by January 15, are not binding, so many are expected to bid just to get the right to see more detailed financials for a second round.
As for who is likely to get the prize (and perhaps a dubious one), the inside word is still that both Time Warner and Fox believe they are well-positioned to make the purchase, for a price that will likely fall between under $2 billion.
My inside sources say the number will likely end up at between $1.8 and $1.9 billion. One likely bidder tells me, “I don’t see anybody putting out a number that starts with a 2.”
Time Warner is sitting on $7 billion in cash from its spin-off of its cable division and has one Bond movie – MGM’s signature franchise – in its vault. But Fox believes it is best positioned since the studio has already been the international distributor of MGM’s library.
Meanwhile, MGM debt continues to trade at a decent price of about 65 cents on the dollar. The buyer would be taking on the $4 billion or so of debt ($3.7 billion plus a $250 million credit revolver) to buy the studio.
And the pressure is still on to close any deal before the next interest due date, which falls in January. The debt-holders have agreed to forebear until the end of January. The original interest payment of about $250 million was due in mid-January, and is now compounded by three months of delayed interest.
Previously: MGM Buys More Time: Lenders Forbear, Again
