Is MGM in Over Its Head in Overhead?

Just two months ago, Metro-Goldwyn-Mayer Chairman Frank Mancuso, Kirk Kerkorian and Seven Network’s Kerry Stokes were popping open champagne during a ceremony marking the $1.3-billion, management-led buyout of the venerable Hollywood studio backed by the reclusive Las Vegas billionaire and Australian broadcaster.

Now, with reality setting in, the fizz may be fizzling.

Sources say MGM’s business plan is under scrutiny and that Mancuso may be at odds with the new owners over what they see as bloated overhead at the Santa Monica-based entertainment company and what Mancuso strongly believes it takes to be a competitive, full-service studio.

A source close to Mancuso, who declined comment Monday, said there have been no conversations about overhead. Representatives of Kerkorian did not return calls and Stokes declined comment.

But others say Kerkorian and his financial point man, former Chrysler executive Jerome York, want to take a knife to MGM and trim overhead by at least 10%. By contrast, Mancuso wants to expand because he believes that cutting will undermine MGM’s standing as a bona fide studio that he and his executive team labored so hard to build.

Mancuso and his team are reviewing the business plan and all department budgets, as they do every year. On Monday, management will make a presentation of next year’s budget at the first meeting of the new MGM board. A source said the budget does not reflect any downsizing at the company. Next week’s meeting, at MGM headquarters, will be attended by Kerkorian and Stokes.

This is Kerkorian’s third round as owner of MGM. Having bought and sold the studio twice, Kerkorian has been criticized for dismantling the company, which he has always said is untrue.

Many believe Kerkorian’s return to MGM is a way for him to prove to the world that he truly cares about the historic studio’s fate, but skeptics insist that if the studio fails to make hits, he will not think twice about flipping the asset once again. Whatever his intentions, Kerkorian didn’t get to be one of the shrewdest investors around by writing blank checks to his operations.

Sources said Kerkorian rushed into the buyout without doing any substantive due diligence on the company, only to discover that the numbers looked worse than he imagined. What’s been an eye-popper for Kerkorian is the amount of cash needed these days to feed the voracious appetite of a studio operation in Hollywood.

One financial source with knowledge of the studio believes MGM could soon face a major cash crunch unless additional working capital can be raised.

Some experts believe that an infusion of about $300 million to $500 million is needed for production and marketing of its movies beyond the $350 million in working capital already allocated to the operation through MGM’s main banker, J.P. Morgan.

Mancuso has always said he expects about $700 million in additional cash flow from the nearly 30 films that the studio has produced over the last three years under its MGM and United Artists labels, and from new production. But some industry sources wonder whether that projection is optimistic as are projected future revenues from its fledging interactive operations.

The reality is, the movie business is very unpredictable.

Although Mancuso and his team proved they are capable of picking hits, having revitalized the studio with such films as “The Birdcage,” “Get Shorty” and “GoldenEye,” they have also seen a number of their movies stall at the box office, including this summer’s “Fled” ($17.2 million), “Kingpin” ($25 million) and “House Arrest” ($7 million), and more recently “2 Days in the Valley” ($11 million), “Larger Than Life” ($8.2 million) and “Mad Dog Time” ($99,819).

Meanwhile, MGM is starved for some major releases since it virtually shut down production during the months-long period it was up for sale. The studio only has half a dozen movies set for release between January and next Thanksgiving and Christmas season, when its first big release--the next installment of the James Bond series--is due out. MGM expects to begin production on the Bond sequel and “Red Corner,” starring Richard Gere and directed by Jon Avnet, in early 1997.

There’s also been speculation that MGM might look to raise additional funds from a public offering, though sources say Kerkorian and Network Seven do not want to see their ownership positions diluted.

MGM’s large overhead is particularly bothersome to the new owners, sources say. What exactly that figure is is a question in itself. People close to MGM stress that overhead is not much more than $100 million.

But other sources say that understates the number considerably. MGM pays $105 million a year in what is considered pure overhead, such as salaries.

An additional $45 million is considered nonrecurring expenses, such as legal fees that the studio might not have to pay again. However, some sources say the nonrecurring number includes fees that the studio will incur repeatedly, notably fees to the Motion Picture Assn. of America and various audit fees.

Add an additional $25 million a year paid out by MGM as part of its one-third ownership of overseas marketer and distributor United International Pictures, in which Universal and Paramount are also partners.

That comes to $175 million, which is less than the major studios, but a big chunk of change for a studio the size of MGM. MGM is generally leaner than other studios because it releases fewer movies--about 17 a year.

Deciding where fat can be trimmed hasn’t been easy. MGM currently has about 770 employees. More than 70 work in the studio’s video division, which some see as excessive because its videos are distributed through Warner Bros. But MGM’s argument is that Warner is strictly a back-room distributor and that MGM is responsible for setting the prices and planning all the marketing and distribution. Moreover, Warner only concentrates on the studio’s newer product, virtually ignoring and failing to exploit the older library films, where there is plenty of money to be made from more than 1,600 titles.

A source at MGM argues that having as many employees in the video department as it does “is about efficiencies” and “finding new ways to market old titles.”

Miramax Hires Distribution Head: New York-based Miramax Films has hired former Cineplex Odeon Executive Vice President Neil Blatt as its new head of distribution. He will replace Jack Foley, who will leave at year-end. Jim Sherry remains as the general sales manager, reporting to Blatt, who starts today as executive vice president of theatrical distribution.

Exhibitor Relations Co. contributed box-office figures to this report.