How MGM Rode 'The Hobbit' to a Possible IPO Payday
This story first appeared in the Jan. 3, 2014, issue of The Hollywood Reporter magazine.
In December 2010, the parent company of MGM emerged from an embarrassing bankruptcy with more than $325 million in lingering debt and, as CEO Gary Barber put it at the time, a "toxic" reputation in Hollywood after years of ownership changes and mismanagement.
Now, three years later, the studio with the famous lion logo is roaring. The $209 million worldwide opening of The Hobbit: The Desolation of Smaug, comes on the heels of 2012's twin $1 billion grossers, the first Hobbit and the James Bond film Skyfall. MGM, which has a 50 percent stake in Hobbit and shares the Bond franchise with producer Danjaq, has used the proceeds to eliminate its debt (which at one point hit $5.5 billion before the bankruptcy), buy back more than $55 million in stock, revive its TV division and invest in new movies including RoboCop and Hercules reboots, due in 2014.
In addition, Barber, a former accountant and veteran Hollywood executive, moved MGM staff from a pricey Century City tower to more modest offices in Beverly Hills, cut overhead by more than $75 million a year, sold some noncore assets, settled legal disputes and has kept MGM lean by working with studio partners that share costs and typically handle domestic distribution. The result: The studio that nearly was sold to Warner Bros. in 2010 for about $1.3 billion (including debt), now is valued at $3.7 billion-plus and is poised for a possible IPO. MGM stock, which since the bankruptcy has traded on the private "gray market" where investors buy big blocks, has soared from $16 in 2011 to nearly $70 a share on Dec. 9.
"The resurrection of those franchise sequels really helped provide momentum to the organization and got MGM back on the map in Hollywood," says James Dondero, president of Dallas-based hedge fund Highland Capital Management, the second-largest holder of MGM equity with an 18 percent stake (after Anchorage Capital Partners, with 27 percent).
Barber declined comment on a possible IPO, and an MGM representative says no decisions have been made, but insiders say a public offering would allow MGM to raise more capital (on top of its $750 million revolving credit facility), make acquisitions or even position the company for a sale at a much higher valuation.
Steven Azarbad of hedge fund Maglan Capital, which has a small stake in MGM, says he believes the $70-a-share price still is low. He reveals a target price of about $100 a share, which would value the company at $5 billion. Helping that effort, MGM will benefit from tax loss carry-forwards of about $1.3 billion, which could boost profits for several more years. (Pre-bankruptcy losses can be written off over several years.) MGM sources say there are more would-be investors than there is stock available. Recent buyers include Daniel Loeb's Third Point and a George Soros-managed hedge fund.
New productions like the Hobbit trilogy (shared with Warner Bros.) and the reinvigorated Bond franchise will provide cash, but as much as half of MGM's value comes from its storied library of more than 4,000 features (including Pink Panther, Rocky) and 10,000 TV episodes (such as The Beverly Hillbillies, Fame). When MGM next reports earnings March 1, Barber has promised to break out revenue from the library for the first time, providing transparency that could boost the value and help fuel an IPO.
"That's very important to us," says Colin Wilson Murphy of Bowery Investment Management. "We think it's indicative that the company is preparing to go public. That's a metric many institutional investors have been asking the company to disclose."
Despite the benefits of an IPO, Dondero, who is an MGM board member, says there are plenty of alternatives available. "It's fair to say the world is our oyster at this point," he adds. "We can grow the business organically, grow out the TV business and increase the movie slate from five or six to seven or eight movies a year."
Plus, if MGM chose to go public, it would feel pressure to improve results each quarter, a tricky task in hit-driven Hollywood. For instance, Hobbit films will end after the third installment in December 2014. But Barber has said he sees consistent growth opportunities from its TV division, which has hits with History's Vikings and MTV's Teen Wolf.
Some believe an IPO would make most sense in the cash-rich six-month window after the final Hobbit and before the next Bond pic, due in 2015. But Dondero says there is no pressure from investors to go public at all or on a specific timeline: "I would describe the ownership group in general as patient and methodical and looking to optimize the value of the asset over time but not in a rush to do so."