A Roar of Approval for Harry Sloan

Oct 31, 2005  •  Post A Comment

When NBC Universal’s Sci Fi Channel last week ordered a 10th season of “Stargate SG-1” (the fifth on Sci Fi) and a third cycle of its spinoff “Stargate Atlantis,” it was a rare bit of good news for the new MGM, the show’s producer (with Sony) and successor to the proud heritage of Metro-Goldwyn-Mayer, which first opened in 1924 and was once Hollywood’s top dream factory.

These days the lion’s roar isn’t heard as loudly. Last February MGM gave up being an independent distributor when it was sold for about $4.8 billion in cash and assumption of debt to an unusual partnership. The now-private company is owned by a global electronics and entertainment conglomerate (Sony, 20 percent), the nation’s largest cable TV system operator (Comcast, 20 percent) and private equity firms Providence Equity Partners (29 percent), Texas Pacific Group (21 percent), DLJ Merchant Banking Partners (7 percent) and Steven Ratner’s Quadrangle Group (3 percent).

They beat out Time Warner in the bid for MGM by paying a hefty $12 a share in cash, based, according to sources, on what have turned out to be overly optimistic projections. The idea was that MGM would continue to effectively milk the biggest modern film/TV library, containing 3,500 movies and 35,000 TV episodes, and make a few new movies while cutting the work force from 1,400 to about 250. The partnership counted on savings from the merger. Sony, according to the scenario, would just add MGM movies and TV to its existing operations and MGM investors would reap the benefits from corporate synergy.

In reality, in the months since the merger, according to sources, MGM revenues from new film/TV production have been minimal and profits from the library and other sources have fallen sharply. One reason is a gap in the product pipeline. For nearly a year before the merger closed, new production pretty much ground to a halt.

The few movies that made it through, like “Into the Blue,” released a month ago by Sony, haven’t been blockbusters. After three weekends, “Into the Blue” grossed only about $18 million, part of a generally off year for Sony movies.

That also means “Into the Blue” will be a minor performer in ancillary markets, where MGM already has a structural problem. Sony’s home video division gets a distribution fee, said by sources to be about 7 percent, on MGM DVD releases. Sony gets the equivalent of 100 percent on its own movies. And even with Sony’s best efforts, the DVD market for movies is peaking, with most sales now going to new product rather than library product, where MGM remains strongest.

That has left some MGM partners, the moneymen especially, disillusioned, according to sources. They now realize it will cost more and take longer to make MGM pay, if it can ever be done. Months ago they decided they needed new leadership. After a long search, last week they selected Harry Sloan as the new chairman and CEO of MGM. Mr. Sloan will also make an investment and reportedly could end up with 5 percent of MGM. He will invest some of the approximately $208 million he received for his 11 percent interest in Scandinavian Broadcasting System, which he founded in 1990 on an investment of $5 million and which was sold earlier this year for $2.05 billion.

MGM represents a career transition for Mr. Sloan, who started as an entertainment attorney, helped revive New World Entertainment and served as chairman of SBS and Lions Gate. He has been known until now for his financial acumen-not as a creative executive. He will need to be both to revive MGM.

Mr. Sloan is expected to produce movies with a combination of financing from Sony, pre-sales and off-balance-sheet sources, while tapping into new digital, online and global markets. It is unclear how much more the partners will put in, considering there are already questions about whether they overpaid majority owner Kirk Kerkorian for MGM.

Mr. Sloan and his partners declined to be interviewed for this column. The company is private and does not publish results. A spokesman for MGM and Providence (which was managing partner until Mr. Sloan arrived) declined to comment on specifics but insisted the partners, including Providence and Texas Pacific, are “not seeking an exit” and added, “It is still early in this investment.”

The two partners who stand to benefit the most, and who are likely to remain in MGM for the long term, are the strategic investors Sony and Comcast. Sony benefits from having more product to offer. And Comcast is already reaping rewards by incorporating Sony content on its cable TV video-on-demand systems. A Comcast spokesman said the company also plans to launch content channels drawing on MGM assets.

MGM does have an option to drop the Sony deal and become an independent distributor next April, but it seems unlikely it will be exercised considering the additional costs involved.

There have been rumors that Sony might buy the rest of MGM now that Sir Howard Stringer, the original architect of the MGM acquisition, is running parent Sony Corp. However, that doesn’t appear likely either, as Sony recently announced a worldwide restructuring and the layoff of 20,000 employees over two years.

Even if the equity investors give Mr. Sloan some time to turn a difficult situation around, the nature of big Wall Street equity investment partnerships is that within a few years they need to sell assets to pay back investors. They rarely stay long term.

That could be accelerated if things don’t rebound. At some point Sony and Comcast might have to act, either alone or with new investors, to salvage the situation. As crazy as it sounds, one of those “new” investors, according to some informed sources, might be Tracinda Corp. That would mean a fourth round of owning some or all of MGM for Mr. Kerkorian, who made headlines recently when he bought 10 percent of General Motors.

The way the global auto business has been going, Mr. Kerkorian might be nostalgic for Hollywood, where he has always profited from investing in MGM even when the studio couldn’t buy a hit.