Resurgence at MGM

Once-dormant movie studio MGM is roaring to new life, ramping up its marketing, distribution and home entertainment divisions.

Just more than a year ago, MGM seemed moribund. After a consortium of financial partners including Sony Corp. of America purchased the company in late 2004, more than 1,000 employees received pink slips, and the grand old studio that once inhabited Sony's present lot appeared a thing of the past. It's a testament to how quickly things change in Hollywood: Since Harry Sloan took over as chairman and CEO in October and Rick Sands came aboard as chief operating officer in January, MGM has embarked on a turnaround that has stunned many within Hollywood and the financial community.

"I thought they were dead and out of the business, and all of a sudden there is this revitalization," says Harold Vogel, an analyst at Vogel Capital Management. "The impression was that Sony would basically have the James Bond franchise, and the rest would just be the library -- but much to the surprise of everyone on (Wall) Street, Sloan is ramping up the whole thing again."

During his few brief months in office, Sloan has inked a slew of deals, including a multipicture distribution arrangement with the Weinstein Co., set up 10 new MGM television channels in Eastern Europe and Asia and made a series of key hires to boost the marketing and distribution divisions. And the studio is in talks on yet another new venture: It will release three animated features made by John Williams and Terry Botwick's Vanguard Animation, opening one a year beginning in 2008.

"It gets MGM into the animated feature business, which allows us access to all sorts of promotional partners, media tie-ins, merchandising, etc.," Sands says.

Why the flurry of activity from a company thought to be no longer in business? Speculation is rampant that Sloan and Sands are beefing up MGM for a sale or merger. "The real question in the revitalization is: How long does MGM want to remain an independent entity?" says one insider familiar with all of the parties. "The answer lies with the private-equity guys (Sony's co-investors) and their returns and time horizon."

While most of Hollywood thinks MGM is now a division of Sony, that company is only one of several investors, holding a 20% stake in MGM (which was sold for a total of $4.8 billion).

"At Providence, they want to be in it for the long term -- meaning five to seven years -- and I think the other guys want to be in it more short-term, though they haven't declared that," says the insider, adding that a sale is not imminent.

But public assurances have not changed the minds of industry insiders who believe that MGM soon will be up on the auction block, with rumors swirling that Lionsgate could be a suitor. MGM insiders and financial sources deny those claims, which stem largely from Sloan's long-term business relationship with Lionsgate CEO Jon Feltheimer, his former colleague at New World Entertainment and then at Lionsgate.

"You buy a company for three things: 1. management, 2. operations and 3. library," says an executive who knows the players. "The (MGM) library is not worth what they'd want, (Lionsgate) operations are redundant with what MGM has, and Sloan and Sands are a very good management team -- they don't need a Feltheimer or (Lionsgate vice chairman) Michael Burns."

Nor would MGM be an attractive acquisition target for any other studio given the current slump in the home entertainment market, which renders MGM's library less valuable. Instead, analysts predict that the company will make an initial public offering, and one executive with ties to MGM believes that the studio's executive team could try to take it public within the next 12 months.

Sands flatly denies those suggestions. "We are building this company," he says. "We are maximizing the value of the underlying asset, which is the library, and we are expanding the asset base. The owners will ultimately make the determination of if and when there is any change in the capital structure, but we are in build mode."

Of all the things Sands and Sloan have built, most important is MGM's 70-person-strong distribution arm headed by president of domestic theatrical distribution Clark Woods. The division has benefited from a pay TV deal with Showtime whereby the cable network is obliged to pay for all MGM product on a sliding scale, based on each film's theatrical revenue.

The Showtime deal is set to expire in 2008, but Sands says that it is only one element in MGM's overall distribution picture. "When you are a major studio, which we are, and you have a major-studio level of distribution, you are able to negotiate TV deals, pay and free, around the world," he says. "So to focus on Showtime would be misleading -- it is one of many TV deals that we have."

The opportunity to access a major studio's distribution operation appeals enormously to outsiders, especially when they do not have to compete with in-house product. As a result, MGM has signed distribution agreements with the Weinstein Co., Bauer Martinez Studios, Kimmel Entertainment, Lakeshore and other production entities. Sands says he expects to release about 25 pictures within the next year.

The Weinstein deal covers seven to nine titles, including the upcoming releases "Bobby," directed by Emilio Estevez; "Killshot," helmed by John Madden, and "Miss Potter," directed by Chris Noonan and starring Renee Zellweger. Unlike other companies that have signed for distribution with MGM, the Weinstein Co. is handling its own marketing. Asked if the arrangement will expire once the Weinsteins' own distribution mechanism is up and running, Sands says, "Let's see how it works."

hen the investors purchased MGM, it was with a view toward releasing MGM's 4,000 library titles through Sony's domestic home entertainment arm. In May, though, MGM inked a deal with Fox to distribute its home entertainment product, sending a clear signal to the community that the Lion was ready to roar once more.

Behind the scenes, the Fox deal had more to do with the fact that Sony had not delivered sufficient revenue -- and that Fox made MGM executives a much more lucrative offer. According to one financial source, when Sony brought together the investors that would help it purchase MGM, it agreed to allow MGM to seek another home entertainment outlet if Sony failed to meet certain numbers.

What MGM executives did was turn to Fox, which not only offered a separate unit to handle the studio's library but also gave MGM a $100 million-plus advance as a guarantee, according to sources. Sands declines comment on that dollar amount.

With three seats on MGM's board -- held by Sony Pictures Entertainment chairman and CEO Michael Lynton, Sony Corp. of America executive vp and chief financial officer Robert Wiesenthal and Sony BMG Music Entertainment chairman Andrew Lack -- Sony reluctantly agreed to the Fox deal, knowing that the move would cost Sony an estimated $30 million-plus in annual revenue but optimistic that the arrangement would add to MGM's long-run value.

"Everybody was disappointed by the performance of the catalog on the home entertainment side," one insider says. "That had as much to do with the market as anything else. Putting it all under one roof with Fox was the best bet."

Sands says his studio's library is performing better than it did previously, but no data are available as MGM is a privately held company.

With MGM fully operational regarding home entertainment and theatrical distribution, key questions remain. One pivotal issue is whether the studio plans to go into production -- Sands says that it is not. He notes that the studio is financing 12 direct-to-video titles under the aegis of MGM executive vp Charles Cohen but believes that it would be a mistake to set up a development unit.

"We are co-producers on our big tentpoles like the James Bond (films) and 'The Pink Panther' (movies), but we don't want to be in that business," Sands says. "Our business is to mitigate risk."

Another issue is what MGM plans to do with its United Artists subsidiary. Sloan has received offers, but sources say none has reached the nine-figure asking price. Sands says UA is not for sale and declines comment on reports that it could be resurrected as a specialty division. "It is an integral part of MGM's assets, and we expect it to remain that way," he says.

The biggest question, of course, is: Can Sands and Sloan succeed in the long term? If they do, both executives will reap hefty financial benefits -- Sloan in particular, as he has an equity stake in the company. Vogel believes that the outlook is promising. "I'm impressed," he says.

A former MGM executive is even more optimistic. "Most of the studios are functioning in a way that is based on a business paradigm that may have been true 15 or 20 years ago but isn't at all true now," he says. "These guys are looking at the business and saying, 'This is how we have to play it today.'"