Dec 22, 2003  •  Post A Comment

If Time Warner doesn’t acquire Metro-Goldwyn-Mayer for the value that can be mined from its extensive film library, then the soon-to-merge NBC Universal or another media conglomerate will. It’s just a matter of time.
Prospective buyers generally have balked at the premium multiple controlling shareholder Kirk Kerkorian has placed on MGM since unofficially putting the studio on the sales block several years ago.
MGM, which has a market capitalization of about $3 billion and has had an asking price of more than double that, pulled out of the bidding for Vivendi Universal Entertainment after making an $11.5 billion all-cash offer for the U.S.-based entertainment entity that will now merge with NBC.
MGM chairman Alex Yemenidjian has repeatedly said that his well-managed company, which is Hollywood’s last independent studio, must be part of a larger media company to realize full value. Indeed, nearly every major media player has met with MGM at least once to talk about merger-and-acquisition prospects and review its books. Most recently, those interested suitors have once again included Time Warner, Wall Street sources said.
But rampant industry consolidation and heightened competition for new interactive revenue streams is giving giants such as Time Warner, NBC Universal, Comcast Corp. and Viacom new reasons to justify paying the price to expand their own content treasure troves.
That’s because the key to future fortunes in the interactive entertainment space is having a broad base of content to license, repackage and sell across a wide array of distribution outlets. It also doesn’t hurt if you are one of the big distribution gatekeepers, such as Comcast.
The potential on-demand pay-for-play options that can be applied to Universal Studio’s vast film and television program libraries is a primary impetus behind NBC’s proposed acquisition of VUE after years of the Peacock’s resisting a studio acquisition.
NBC only now is getting its feet wet at managing an entertainment cable network with its ownership of Bravo, having had mixed results with its cable news networks. But the General Electric subsidiary understands that it has to own content to monetize it in newly formed or existing cable networks such as Universal’s USA and Sci Fi, or in new subscription video-on-demand services such as the ones NBC is talking about launching after it closes the VUE deal next spring.
Time Warner already is expert at cycling its Warner Bros., New Line and other film library product through its Turner cable channels and The WB network. MGM also has many of its own branded cable channels that tap its film and television libraries.
In an recent interview with me, Time Warner co-chairman Jeffrey Bewkes did not dismiss the possibility of Time Warner seeking to acquire available film libraries such as MGM and, in fact, made the argument why Time Warner would be the perfect buyer.
“There are libraries out there that we could put together. But Warner Bros. already has a fairly large library. That’s not to say we would be averse to having more stuff because Warners is making at least 50 percent more money in reported earnings and cash flow than its nearest competitor. We know how to do this well,” Mr. Bewkes told me.
But Time Warner could find itself in a bidding war, something MGM has long desired. While it is not Comcast’s style to engage in a bidding frenzy, the largest cable operator needs to make a big content play to remain competitive with Time Warner, whose goal it is to become a stronger No. 2 cable operator through system acquisitions.
While Comcast also passed on what it considered to be the pricey VUE assets, opting to grow its smaller-name content franchises organically, it has the financial resources and strategic rationale to make a play for MGM, The Walt Disney Co. or even Time Warner, if it ever gets around to spinning off its AOL unit and its cable systems.
For now, Wall Street remains skeptical.
JPMorgan analyst Spencer Wang, in a client report, noted that MGM historically has been the focus of takeover speculation and that Time Warner has recently regained financial flexibility through asset divestitures.
Still, “We would be surprised if Time Warner purchases MGM outright,” Mr. Wang said.
“Although there may be some benefits from combining Time Warner’s world-class film distribution infrastructure and MGM’s vast film and television library, we think the strategic merits are somewhat questionable for Time Warner,” Mr. Wang said.
Mr. Bewkes said it is likely Time Warner will acquire the 50 percent it doesn’t own of Court TV from Liberty Media Corp. and will likely acquire more cable systems, although source said those most likely will come from Adelphia Communications, when it emerges from bankruptcy next year, or from Cablevision Systems, when the ruling Dolan family decides to finally sell.
Comcast has done a brilliant job this year of demonstrating just how swiftly disciplined players can improve the value of their acquisitions if they are in businesses and assets they already successfully operate. Having lost more than $200 million in equity value on its troubled AOL merger, Time Warner clearly is committed to that more targeted expansionist view.
Don Logan, Time Warner co-chairman, who is overseeing communications and AOL, told me, “All of our businesses are performing well. We like all of our businesses and we’re performing best in case. So from an investment opportunity out of all these groups-be it a cable channel, be it a movie library, be it a way to expand our cable [system’s] footprint, new magazines-we will be looking at all of those as we have additional money to invest.”
The merged NBC Universal would be another candidate to acquire MGM and its film library down the road, though in a recent interview with me, NBC Chairman Bob Wright denied any recent discussions about such a deal. Money is no object for NBC, which is expected to generate $2.2 billion in operating income against $8.3 billion in revenues in 2004 and can tap the deep pockets of corporate parent General Electric.
Moving past the anticipated top NBC management reshuffling made official this week, Mr. Wright conceded all eyes and strategic minds are focused on how best to monetize Universal’s library across what will be NBC Universal’s expanded broadcast and cable television base, with a special mind to effectively rebuilding its prime-time schedule.
Mr. Wright, who remains chairman of the new NBC Universal and a GE vice chairman, divided his proposed expanded domain between his two top lieutenants. Jeff Zucker, president of the NBC entertainment division, assumes control of all news and cable content operations. Randy Falco, president of the NBC Television Network will become president of NBC operations, which will include Telemundo, in addition to the advertising marketing and affiliate operations he currently oversees. Ron Meyer will continue to oversee Universal studio, which generated $4 billion in annual revenues, and theme parks.
NBC’s biggest challenge is getting its arms around the studio’s film library in a multichannel universe, and fiscally managing it as an adjunct of the merged company’s dominant television operations in a way that doesn’t curb its creativity.
For months, NBC executives have been poring over bulging binders that include an accounting of the licensing and availability of Universal film and television product. They are identifying ways in which the new NBC Universal can immediately begin to mine the content it controls to generate additional revenues from new services.
Time Warner could arguably make the best, most immediate use of an MGM film library, since it has a dominant film studio and an array of cable and broadcast networks to feed. What it also has are some new options on how to position and sell new video services through its own cable systems or online through its much maligned AOL service.
But it will, as it always does, come down to a matter of price.
The point is, the discussion about acquiring an MGM film library or a Universal film library
is different as the entertainment world steps into an interactive age gone mainstream. The multiple might be easier to justify if there are more cost-effective, sure ways to use the product.
And that’s the strategy that will drive the business in 2004.