MGM Stock Roars Past Short Sellers
When it comes to short sellers, the Lion isn’t taking it lying down.
For two weeks, Hollywood studio Metro-Goldwyn-Mayer has been embroiled in a war with short sellers, traders who bet that a stock will fall in price.
The company has taken several actions that bedeviled short sellers by driving up the price of MGM stock. Though MGM executives say squeezing the “shorts” was unintentional, few short sellers believe them.
“We did it because we are very shareholder-friendly. We didn’t do it because we wanted to squeeze the ‘shorts.’ In the process, they may have been hurt badly, but it’s a side effect. We don’t spend our time trying to figure out how to squeeze the ‘shorts,’ ” MGM Chairman Alex Yemenidjian said.
Nonetheless, Kirk Kerkorian, who controls the company, and longtime lieutenant Yemenidjian have a strong dislike for short sellers, who often bad-mouth stocks to other investors and the media in hopes of driving down prices. MGM has been a favorite target of short sellers lately.
Kerkorian, one of the nation’s wealthiest individuals, and Yemenidjian have a history of battling short sellers and taking action, such as stock buybacks at Kerkorian’s MGM Grand gaming company, that ended up squeezing the shorts.
“I would have thought that the ‘shorts’ would have learned their lesson with MGM Grand and heavily shorting a company in which the principal shareholder can take the entire company private at a premium from petty cash at a moment’s notice. Does somebody have a death wish?” Yemenidjian said in an interview Thursday.
In a short sale, a trader borrows stock and sells it, hoping to repay the loan later with shares purchased at a much cheaper price. Short sellers target stocks they believe are overvalued, for whatever reason.
Yemenidjian said short sellers are spreading misinformation about MGM’s businesses and how much cash operations generate. He said MGM plans to ultimately win the battle through “a great performance by the company.”
Tensions were exacerbated this week by a phony Internet posting, which MGM suspects was planted by a short seller. In that message, someone posing as former studio chief Frank G. Mancuso, who remains a consultant, advised people to sell their shares. MGM quickly posted its own message saying that the alleged Mancuso message was a fraud.
Earlier this month, MGM decided to scrap an offering to sell some $750 million in new common stock, citing its depressed market price. Instead, it subbed a “rights” offering, allowing its stockholders to buy shares for $14.50 apiece, the majority of which would be bought by Kerkorian.
The net effect of all that was to boost MGM’s share price from $15.50 then to nearly $24 by Oct. 13. It has edged down somewhat, to $20.38 on the New York Stock Exchange on Friday.
The stock surged as investors’ fears about “dilution” diminished when the stock offering was nixed, and as some found the rights-offering price attractive. As the stock price rose, it squeezed traders who were short, causing many to scramble to buy the stock to close out their positions.
Despite a rough two weeks for MGM short sellers, some investors aren’t worried and remain bearish about the company. Thomas Chanos of Badger Consultants in Madison, Wis., who is short MGM and has been adding to his position in the wake of the stock run-up, said he believes the studio’s stock should be “in the single digits.”
Indications are that Chanos isn’t alone. Short interest--the amount of MGM stock sold short that hasn’t been repurchased--continues to climb, rising 34% to 4.9 million shares in the month ended Oct. 15.
Chanos said he believes the stock offering was canceled because MGM couldn’t find enough buyers. Chanos argues that the movie business is bleak and that MGM has a history of flops, burns up money too quickly, and will likely dilute its shareholders’ stake and run up its debt in the future.
“They want to make more movies. If that’s the turnaround plan, I’m not worried. That just costs more money and they have no track record of making blockbuster movies,” Chanos said.
MGM, known for its famous lion logo, has lost money throughout the decade and has had only occasional hits, such as its James Bond films. The company was decimated by former owner Giancarlo Parretti, an Italian financier now facing federal fraud charges stemming from his MGM purchase.
MGM posted a profit in its most recent quarter, although much of it is attributable to the fact that in a previous quarter it wrote down “Stigmata,” which ended up performing better than expected. “The Thomas Crown Affair” and “Tea With Mussolini” also helped profit.
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Squeezing the Bears?
MGM stock rocketed in early October in what some analysts said reflected a rush of buying by “short sellers” who gave up on bets that the price would continue to slide. Daily closes since Sept. 1:
Friday: $20.38
Source: Bloomberg News.
