Staying at MGM Until the End

Sep 27, 2004  •  Post A Comment

MGM Chairman Alex Yemenidjian and Vice Chairman Chris McGurk have committed to stay on board to keep the studio operational for the next six to 12 months, until the $5 billion sale to a consortium led by Sony Corp. of America is complete. In separate interviews with TelevisionWeek, both executives said that beyond that their plans are unclear, but it is highly unlikely either will stay on following the sale.

“I don’t know what I’m going to do. I really haven’t thought about it,” Mr. Yemenidjian said. “I have been so busy and will continue to be busy, because I want to be sure to deliver a top-notch company.”

After months of speculation, negotiation and deal-making, a definitive agreement was signed last week for the investor group led by Sony to acquire MGM for $12 a share and assumption of MGM’s approximately $2 billion in debt. This marks the third time in 36 years that MGM has been sold by majority owner Kirk Kerkorian, 87, whose fortune Forbes magazine last week listed as $5.8 billion.

The new investors in MGM are Sony, which is putting up $300 million and will merge MGM and sister label United Artists into Sony Pictures Entertainment; Comcast Corp., which is putting in another $300 million, with plans to launch domestic cable TV channels using the MGM/UA and Sony libraries; and investors Providence Equity Partners ($525 million); Texas Pacific Group ($350 million); and DLJ Merchant Banking Partners ($125 million). JP Morgan Chase leads a bank syndicate providing up to $4.25 billion in senior debt financing together with Credit Suisse First Boston.

When the deal is closed, Mr. Kerkorian, primarily through his holding company Tracinda, will receive almost $2.1 billion for his 73.6 percent of MGM’s equity. Mr. Yemenidjian and Mr. McGurk will also cash out millions in stock and stock options. There will also be a payout for many of the 1,400 MGM employees, most of whom were given at least 200 shares of stock as an incentive since the new management team led by Mr. Yemenidjian was installed in April 1999.

None of the MGM employees are guaranteed jobs, although Sony executives said privately they will cherry pick some key personnel to stay after the sale. The majority, however, will lose their jobs. However, the terms of the transaction include a “generous” severance package for those who are not selected to stay, according to Mr. Yemenidjian: “Those that don’t will be very well taken care of.”

While praising the deal as good for shareholders, Mr. Yemenidjian admitted it was a “bittersweet” moment for him and for Mr. Kerkorian. That is because the plan when he came on board just over five years ago, after helping turn around Mr. Kerkorian’s gaming interests, was to build a much bigger company. “We came here to turn the company around and use it as a vehicle to make acquisitions,” Mr. Yemenidjian said. “We wanted to grow the company, make it a big entertainment company.”

There were a number of false starts in that direction. For instance, MGM bought 20 percent of Rainbow Media, which owns the AMC cable channel and others, with the intent to acquire the entire company. When it became clear that wouldn’t happen, they sold their stake at a small loss and moved on.

“We were the only public company in Hollywood that was dependent on content, both new and library product,” Mr. McGurk said. “We wanted to vertically integrate as well as diversify and begin to generate new streams of income.”

Their biggest shot came last year when MGM made a serious bid to acquire the U.S. entertainment assets of Vivendi Universal, only to eventually drop out of the bidding. The VUE assets were subsequently acquired by NBC.

“When that didn’t happen we looked around and tried to acquire other studios. There isn’t much available and what is available is at very high multiples [high valuation]. We were at a point where if you can’t grow, we certainly didn’t want to watch grass grow. So we began for the first time to respond to inquiries and approaches [from potential acquirers].”

There is a widespread perception that Mr. Kerkorian always planned to sell once he could get his price, but Mr. Yemenidjian, who talks to him on a daily basis and plays tennis with him most weekends, insisted that was not the case. “There was a misconception in the press we were sort of pedaling the company,” said Mr. Yemenidjian. “But we never solicited a buyer. Even in this round, both Time Warner and Sony came to us. We never solicited a buyer.”

Mr. Yemenidjian said it is also incorrect to look at the sale price as $12 a share. It is actually $20 a share for most shareholders. He said you have to add another $8 per share, which was paid earlier this year as a special dividend. That money is represented in the Sony transaction as $2 billion in debt.

The irony of the sale is that after years of picking the wrong managers for MGM, while still making a profit buying and selling the studio, Mr. Kerkorian finally found competent management in the team led by Mr. Yemenidjian and Mr. McGurk. While they had their share of failures and flops, they managed to stabilize the studio and diversify it enough that it wasn’t completely dependent on the success or failure of the next movie or TV project.

Hollywood Outsiders

When they arrived in 1999, Mr. Yemenidjian and Mr. McGurk were both seen as outsiders by much of Hollywood. In Mr. Yemenidjian’s case, he was literally making his first move into show business. Mr. McGurk, after starting his career at Pepsi, had been a successful executive at Disney and Universal, but in both cases he was perceived more as a business executive than someone involved in the creative process.

They quickly came up with a new set of “values” for how they would operate MGM, and set out an eight-point plan to revive the company whose logo is a roaring lion. Those efforts were bolstered by the acquisition of the film libraries of Samuel Goldwyn, Polygram, Orion and others. The new management also spent to buy back home video rights held by Time Warner’s Warner Bros. And to undo a long-term basic cable deal with Turner Broadcasting, as well as a number of long-term foreign output deals. Once they had control of their own assets back, the new managers set out to maximize the value of the library, which Mr. McGurk said was “job one.”

“Our goal was to dramatically increase cash flow out of the library,” Mr. McGurk said. “It made it much easier to be smarter about the film business because we were less dependent on new film product. That library cash flow filled the peaks and valleys of volatility [between move releases].”

In movies, they took a disciplined approach to finances and budgets. While they invested in a few large budget “tent pole” movies each year, the key to their success were the six to eight lower budgeted movies they produced. That resulted in some extremely profitable hits including “Barber Shop,” “Jeepers Creepers” and “Legally Blonde,” which in turn spun off sequels, and is now being developed for Broadway and as a syndicated TV series with Tribune.

When they arrived, there was a perception that the only real current asset MGM had was the James Bond franchise of movies. “What we did with `Bond’ was we took it out of a two-year cycle and put it in a three-year cycle,” Mr. Yemenidjian said. “There used to be this misconception that MGM was a one-trick pony, that the company was so financially dependent on Bond that we needed to have that fix every two years. Based on the financial restructuring Chris and I did, we could afford to not do a Bond for five years if we wanted to. That afforded us the opportunity to take our time and do it right.”

The result has been the two most successful Bond releases in history, “The World Is Not Enough” and “Die Another Day,” with another in development.

Although it has had its share of flops, Mr. McGurk insisted that the movie division has been profitable every year since they have been in charge.

In TV, the new management quickly pulled the plug on the studio’s involvement in broadcast network production, which brought in big revenues, but even bigger costs and risks. “It did
n’t have the risk-reward profile that was right for us,” Mr. McGurk said.

No Deficits

The new mandate was that there would be no deficit financing. Instead, they brought in new managers, including Hank Cohen, who switched efforts to first-run syndication and producing for cable TV. “It provided a lower upfront investment and quicker return,” Mr. McGurk said.

MGM currently has five shows on the air including “Stargate,” which Mr. McGurk said is the second-most-profitable franchise the company holds after the “Bond” movies. This year it has also spun off a sequel, “Stargate Atlantis,” which has scored high ratings for the Sci Fi Channel right out of the gate.

Mr. McGurk would not be specific, but other sources estimate the “Stargate” franchise is worth at least $200 million in pure profit to the company over a period of years.

Under this management team, MGM also launched a series of branded cable channels around the world, usually with a local partner who paid most of the out-of-pocket costs. These channels, now reaching more than 110 countries, are not only profitable, said Mr. McGurk, but also “made the library more valuable and allowed us to plant the flag for the brand in developing territories all over the world.”

The comparative revenue and profit numbers from before and after this management arrived are not impressive, but Mr. Yemenidjian insisted they don’t tell the real story. “In 1999, when Chris and I came in, the company had $400 million in negative cash flow, and about $1.2 billion in debt” he explained. “In calendar 2003, four years later, the company had $200 million in positive cash flow and zero debt.”

Still, as its competitors grew larger and more diversified, MGM felt constrained by its size and inability to acquire any of the string of companies it looked at over that period.

“We got the company back on its feet. We got the operation working,” Mr. McGurk said. “We put together an exemplary management team that did a fantastic job taking a kind of new approach to the business-which was library focused and cash flow focused. We proved it worked in the marketplace, despite the fact we sometimes felt we were very resource constrained. It was as if we were fighting panzer tanks with calvary. And ultimately we brought the company to the point where we were able to do a transaction to everybody’s benefit.”

Mr. Yemenidjian isn’t sure if he will stay in show business or move on to other challenges once the MGM deal is done. He has a great reputation with Wall Street and remains on the board and executive committee of MGM Mirage (Mr. Kerkorian’s gaming company), although he insists he will not return there. No longer an outsider in Hollywood, he is now being mentioned in the press as a possible successor to Michael Eisner at Disney.

Mr. Yemenidjian sees a common thread between gaming and Hollywood: “In both businesses you are creating unforgettable experiences for your customer. We’re both trying to get an emotional reaction out of our customers, whether they are sitting in a theater or in a casino. But there are some things [about show business] that are unique. It’s the only business I know where you can act and do everything right but still fail.” n

Jay Sherman contributed to this report.