Kerkorian Is Betting That MGM’s Film Library Will Pay Off Big Time

Once again, Kirk Kerkorian is defying Hollywood’s conventional wisdom.

It’s long past the time when everyone expected him to cut his losses and list his Metro-Goldwyn-Mayer Inc. studio in a fire sale. He’s spent more than $2 billion on it so far, only to be rewarded with a pathetic record at the box office for nearly every movie that doesn’t feature a character named James Bond. Last year, the company lost $157.6 million.

Instead, the billionaire--who owns 90% of publicly traded MGM--continues to bulk up, spurn overtures to sell the studio’s library from such product-hungry media companies as Cablevision Systems Inc. and seek strategic partnerships and licensing deals to leverage a catalog of 5,100 films that MGM claims is the largest film library in the world.

It was shocking enough when Kerkorian, one of the nation’s savviest investors, came out of nowhere and led a group that purchased MGM in 1996 for $1.3 billion from French bank Credit Lyonnais--the third time the Las Vegas recluse bought the studio.

Even more perplexing has been his decision to continue to shell out money--more than $600 million so far--in a shopping spree for the libraries of Orion Pictures and PolyGram Filmed Entertainment and to settle an onerous video deal with Warner Bros. negotiated by former studio owner Giancarlo Parretti. For good measure, MGM is pitching in an additional $5 million to end a nasty lawsuit with Sony Pictures that should guarantee no other studio can poach MGM’s most valuable asset--the Bond franchise.

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The logic for Kerkorian’s behavior, however, is fairly simple. Yet for someone who is 81 years old, Kerkorian has his sights set far into the future.

His bet is on the development of new technologies, including the Internet and digital delivery of movies, to dramatically increase the value of Hollywood’s film libraries. Wait a couple of years, this view holds, and the library MGM has accumulated will be worth a lot more than it is now, more than making up for the money Kerkorian has pumped into MGM in the short run.

In early January, MGM paid $235 million to buy about 1,300 titles from PolyGram’s library, including the hits “Fargo,” “Four Weddings and a Funeral,” “The Graduate” and “When Harry Met Sally.” Combined with the Orion/Goldwyn titles MGM acquired in 1997 for $221 million, and its own MGM and United Artists catalog, the studio possesses more than half of the studio-made films produced since 1948.

Kerkorian’s camp claims he has no plans to sell MGM.

“Many companies have approached us. We tell them upfront we are not for sale. We’re prepared to invest even more in the studio,” says Alex Yemenidjian, a top Kerkorian lieutenant who serves as a director of MGM.

Industry analysts, however, speculate that MGM will be sold sooner rather than later. They point to how difficult it is for movie companies lacking assets in such areas as cable, broadcast and music to survive in a business now dominated by media conglomerates Time Warner Inc., Walt Disney Co., Viacom Inc. and News Corp.

Program suppliers such as King World Productions, which last week entered an agreement to be sold to CBS for $2.5 billion, are increasingly being gobbled up, leaving only a handful of stand-alones.

As a movie studio, MGM is also a poor rival and hardly the first stop for top stars and directors. A far cry from its glory days, MGM--headed by Chairman Frank Mancuso--has for years operated as a pale version of its competitors and only sporadically has sustained any kind of box-office momentum.

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But it’s important for MGM to continue producing movies; that’s how the company freshens its library, with new hit titles that can be packaged with old standards. Unfortunately for MGM, with the exception of the James Bond films, its library is being freshened with stinkers, many of them recycled ideas.

MGM’s most recent release, “The Mod Squad,” a contemporary twist on the popular 1960s-’70s TV series, was a flop, getting some of the worst reviews so far this year. The film, which cost $21 million to produce and at least that much to market, has so far grossed a paltry $10.5 million.

The studio’s poor track record has spurred speculation that MGM Pictures President Michael Nathanson may soon be out of a job. His division was responsible for such recent duds as “At First Sight,” “Disturbing Behavior,” “Dirty Work” and “Species 2.”

Internally, there’s the usual finger-pointing at marketing for not getting large audiences to the first weekend. A spokesman for MGM said the company does not comment on “Hollywood gossip.”

MGM’s sister label, United Artists, headed by Lindsay Doran, has fared better. Despite some bombs, including most recently “The Rage: Carrie 2,” the unit turned out last year’s “Ronin,” “The Man in the Iron Mask” and the most recently released Bond sequel “Tomorrow Never Dies,” which grossed $340 million worldwide.

The studio is banking on its next Bond installment, “The World Is Not Enough,” a Nov. 19 release starring Pierce Brosnan, which cost more than $100 million.

More immediately, the studio is pinning high hopes on UA’s June release of “The Thomas Crown Affair,” a remake of the 1968 romantic thriller with a script by Leslie Dixon and Kurt Wimmer. It is directed by “Die Hard” director John McTiernan and pairs Brosnan and Rene Russo in the roles originally played by Steve McQueen and Faye Dunaway.

Short of a dramatic turnaround in its movie operation, MGM may survive only as a library entity in its next incarnation.

Kerkorian has tried but so far failed to recruit a high-level Hollywood executive to help lift MGM out of its morass. Mancuso, who has been running the studio since 1993, has about 2 1/2 years left on his contract.

MGM officials insist there are no plans to abandon production and theatrical distribution. A top MGM executive said the film losses aren’t significant in relation to the value of the library, which some estimate at $3 billion.

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Still, analyst Matthew J. Harrigan of J.P. Morgan Securities Inc. estimates that MGM’s red ink on new films is running at $85 million annually. “MGM simply has to reduce its burn rate on new box-office releases,” he wrote in a report last week.

Kerkorian certainly isn’t counting on MGM’s movie business to churn big profits. His top priority remains clear: maximize the value of the library and seize all new opportunities as a content provider.

Recently, he’s taken some significant steps that analysts and investment bankers agree could make MGM much more attractive to potential buyers. Key to that was settling the arrangement with Warner Bros., which distributed MGM’s videos based on a contract negotiated by Parretti that ranks as one of the worst deals ever made in Hollywood. Under the deal, if MGM were sold, any buyer would have had to let Warner continue to distribute its videos. The deal also gave Warner wide-ranging control over such things as co-production and co-financing ventures MGM might have wanted to make with other studios.

While settling the deal will cost MGM $225 million (and some analysts believe the studio had to pay a $50-million to $75-million premium for early termination), it was a strategic imperative.

Analysts estimate that by being a self-distributor, MGM--which takes control of its video product on Feb. 1, 2000--will net an additional $25 million to $40 million in annual cash flow, taking into account about $10 million more in overhead.

Harrigan wrote in another recent analysis that MGM’s decision to end the Warner video deal “facilitates the possibility of a sale to a major studio buyer.”

Ken McCormick, former managing director of the Los Angeles office of J.P. Morgan, MGM’s investment banker and the man Kerkorian recently hired as MGM’s chief corporate strategist, said that despite the actions making MGM potentially more attractive to buyers, “my impression is that Kirk is definitely interested in building value and I don’t see his exit strategy at all.”

In the three years he’s been associated with Kerkorian and Mancuso, McCormick said, “there’s been a fairly clear mandate to go out and acquire content . . . and to harness that content in new distribution opportunities.”

The idea is that as new technologies such as the Internet, DVD, video on demand and digital satellite platforms proliferate, the value of content will rise.

McCormick’s mandate is to find strategic partners for MGM in cable, broadcast or the Internet so the company can more effectively compete with end-users like Warner, Fox and Disney.

MGM is also talking to various other Hollywood studios about the possibility of an international video-distribution partnership.

Although the recent developments at MGM may not result in a sale of the legendary studio tomorrow, McCormick conceded, “all companies are for sale; just ask the Arco executives.”