Can a zombie studio such as MGM be brought back to life? The answer is yes if Wall Street is willing to provide fresh money.
MGM, which only emerged from bankruptcy on Dec. 20, is now scheduling a new installment in its James Bond franchise for November 2012. Its newly appointed co-CEOs, Gary Barber and Roger Birnbaum, who also own Spyglass Entertainment (which, with a deal with Fox, competes with MGM), already have made a deal with Sony to distribute -- and put up half the financing for Bond 23.
Raising the balance of the money is no problem because after a NewYork bankruptcy court wiped out all of MGM’s nearly $4 billion in debt, JPMorgan Chase stepped in and arranged for a fee a new $500-million line of credit for MGM. The bank can well afford to do so because it earned over $100 million in the fees it charged other banks for placing the earlier $3.7 billion loan that MGM had effectively defaulted on.
MGM’s financing roller-coaster ride over the past decade, if nothing else, illustrates how the insiders in Hollywood still manage to enchant outsiders on Wall Street. The MGM follies began in 2004, when its owner, Kirk Kerkorian, who had made a fortune buying and selling MGM, decided the time was ripe to sell it yet again. The principal asset he offered was its legendary library of 4,100 motion pictures and 10,600 television episodes. By licensing these titles over and over again to Pay-TV, cable networks, and television stations around the world, and selling DVDs from it, it had brought in roughly $600 million in 2003.
Extrapolating future library revenue in Hollywood requires more than simple math. For example, in the case of MGM, each of the 4,100 titles had its own contractual terms governing payments to partners, talent, guilds, and other parties. For example, the single most valuable component, the James Bond films, is half owned by the holding company of the Broccoli family. Just making these payments entailed issuing more than 15,000 checks per quarter. Not only did titles have different pay-out requisites, but their future revenue stream depended on factors specific to each movie, such as the age of its stars, its topicality, and its genre.
Sony had a strategic reason for wanting to control, if not own this library. It was engaged in a take-no-prisoners format war with Toshiba and Microsoft for the future of high-definition storage. Sony had its Blu-ray disc; Microsoft and Toshiba, had the competing HD-DVD format. Since its rivals had deep pockets and were offering huge cash inducements to studios -- Paramount and Dreamworks got $136 million -- to put their titles exclusively on the HD-DVD format, Sony needed a coup. It correctly calculated that by getting all the titles in the huge MGM library, together with its own library on its Blu-ray format, would give it a decisive edge. The problem was that Kerkorian wanted about $5 billion for MGM.
To accomplish this coup without risking much of its own capital , Sony put together a consortium of investors to do a leveraged buy out.
