The bidding for independently-held MGM Studios failed to generate the $2 billion bid that current private equity owners had hoped for, though still drew a respectable $1.5 billion bid from Time Warner, Inc. (TWX). Other bidders were reported to be Lions Gate Entertainment (LGF) and privately-owned Access Industries.
Three other companies had considered bidding for the studio: Liberty Media Corp. (LINTA), AT&T (T) and independent Summit Entertainment. None of the three is reported to have offered a bid in a process that was held open until Monday after Time Warner didn’t make a bid by the Friday deadline. News Corp. (NWSA) is also reported to have offered some cash and help with restructuring but did not enter a bid for MGM.
MGM is mired in debt — some $3.7 billion — much of which is the result of the 2005 buyout by four private equity firms for about $5 billion. The company also has a $250 million revolving credit facility that is coming due next month.
If the MGM bidding didn’t attract much attention, activist investor Carl Icahn’s unfriendly offer of $6 per share for Lions Gate could be part of the reason. Icahn thinks that purchasing MGM is a bad idea for Lions Gate, and he had hoped to acquire a majority of the 81% of Lions Gate that he doesn’t own in order to prevent the studio from buying MGM.
Icahn’s reasoning is interesting. He doesn’t believe that back catalogs, such as MGM’s nearly 4,000 titles, have as much value now that DVD sales are falling. In Icahn’s view, distribution is where the money is and that is where Lions Gate focus should be. The studio refused Icahn’s offer, which was worth about $575 million.
Icahn may have put his finger on the real issue, though. Blockbuster Inc. (BBI) has just signed a deal with Time Warner allowing the movie rental stores to rent Warner Bros. DVDs on the same day the DVDs go on sale. Warner recently signed deals with Netflix (NFLX) and redbox under which the rental companies agreed to a 28-day waiting period following a DVD release before starting rentals.
DVD sales and rentals are drying up as streaming video makes inroads with the movie-viewing public. Even relatively modest connection speeds make watching movies and favorite TV shows possible for very little cost. Once consumers get the hang of just renting the content and not having to hassle with the physical disk itself, the video rental stores lose even more business. Kiosks like redbox are popular now, but their limited selection and hassle will eventually do them in as well.
MGM’s catalog is worth a lot of money if the company that buys the studio has the imagination and the talent to solve the distribution issues. Time Warner’s advantage lies with its cable TV operations, which give it a hosting place for the MGM catalog. Licensing the catalog to a streaming video vendor will generate some return, but the distribution company stands to make the largest portion of the return. If Time Warner or one of the other bidders for MGM is willing and able to do that, then the price is certainly right.
