Trying to Add Another Chapter to Studio’s Story

For the third time in 16 years, gaming mogul Kirk Kerkorian is betting he can hit the jackpot by finding a buyer for the once-fabled Metro-Goldwyn-Mayer studio.

Kerkorian is known to be seeking a tax-free, stock merger with a large media conglomerate that would leave him a major shareholder in the acquirer, while keeping MGM alive as a going concern.

After a story in The Times on Tuesday about MGM soliciting bids through investment bank Goldman Sachs, the company’s shares jumped $2.39 to $22.27 on the New York Stock Exchange. But no MGM deal is imminent, sources said Tuesday.

The 84-year-old reclusive billionaire, who owned MGM twice before and today controls it with about 80% of the stock, is trying to cash in on a growing demand for the company’s deep library of more than 4,000 movie titles, which include the James Bond and Pink Panther movies, classics such as “The Graduate” and “Rain Man,” and recent hits such as “Legally Blonde.” That demand for movies is being fueled by a proliferation of DVD sales, which have become a major cash cow for studios, plus a growth in cable channels and the emergence of new technologies to distribute entertainment.

But the $7-billion sale price Kerkorian purportedly wants is causing even the biggest players in entertainment, including Walt Disney Co. and Viacom Inc., to wince.

“Everyone would love to have the company because of the library, but the price is too prohibitive,” said the head of one major media company. A high-level executive at another company that has long lusted after the MGM library concurred: “It’s too expensive.”

So far, none of the big entertainment firms solicited by MGM, including AOL Time Warner Inc. and Vivendi Universal, has formally bid because of the price.

MGM officials wouldn’t comment specifically on any prospective deal, but released a statement Tuesday saying that no agreement has been reached and there are no assurances one will be. MGM reiterated they are evaluating various business combinations, as they have for the last two years.

“We’re continuing to move ahead with our business agenda as usual in movies, TV and home entertainment. We’re greenlighting pictures and new television shows,” said MGM Vice Chairman Chris McGurk. He said MGM is actively developing a “Legally Blonde” TV show with ABC, and began shooting the 20th installment in the James Bond film series Monday, for November release.

With a personal net worth of some $5.3 billion, Kerkorian is considered a savvy trader who usually ends up with a hefty profit in his deals. He is the dominant player in Las Vegas, controlling such hotel casinos as the MGM Grand, the Mirage and the Bellagio.

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Difficulty in Being Stand-Alone Studio

Beyond Kerkorian’s personal goals, the prospective deal for MGM shows that it is nearly impossible for a company that just makes movies to go it alone today in the volatile, risky entertainment business dominated by a handful of diversified giants.

Other stand-alone studios such as DreamWorks SKG face the same dilemma. Nearly every major media company now weaves its studio operation into an array of distribution assets that includes cable channels, TV networks and Internet businesses.

MGM management has publicly acknowledged that one reason it wants to become a larger, more diversified company is to be less dependent on box-office revenue to make its money.

Led by Alex Yemenidjian, MGM chairman and longtime Kerkorian protege, the company has sought deals with other firms, such as paying Cablevision Systems $825 million for a 20% stake in four cable channels, including Bravo.

Entertainment analyst Jeffrey Logsdon of Gerard Klauer & Mattison said it appears Kerkorian has come to the realization that “he could not build an entertainment conglomerate one film at a time.”

In a report Tuesday, Salomon Smith Barney analyst Jill Krutick called MGM a “ripe takeover target” and said all of the major entertainment companies could benefit from MGM’s film library because of the popularity of DVDs.

Once Hollywood’s golden studio, MGM hasn’t been a major force for decades. It once boasted “more stars than there are in the heavens” when its stable included Judy Garland, Clark Gable, Gene Kelly and Greta Garbo. And its name is associated with such classics as “The Wizard of Oz,” “Singin’ in the Rain” and “Gone With the Wind.”

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Mixed Box-Office Record in 2001

For the last 15 years, MGM has operated mostly in chaos under four owners, twice under Kerkorian. Kerkorian originally bought the studio in 1969, selling it to mogul Ted Turner in 1986 for $1.25 billion. But Kerkorian bought it back from a cash-strapped Turner for $480 million and got various MGM assets, including the name and United Artists’ valuable film library. Turner kept about 3,000 film titles, including “Gone With the Wind” and “The Wizard of Oz,” now owned by AOL Time Warner.

Kerkorian sold MGM for the second time in 1990 to Italian businessman Giancarlo Parretti for $1.3 billion, who left the studio a mess by selling off film rights. Lender Credit Lyonnais seized the studio from Parretti a year later. Then Credit Lyonnais sold it for $1.3 billion in 1996 to Kerkorian and Australian broadcaster Seven Network, with Kerkorian buying out Seven two years later. Kerkorian sold a minority stake to public investors in 1997, raising $180 million.

Kerkorian’s current investment in MGM is between $3 billion and $4 billion, including the 1996 acquisition, various cash infusions and the cost of buying back some film rights sold by Parretti.

The company’s finances have improved from the early 1990s, thanks to cost-cutting and such profitable films as the James Bond franchise, “Hannibal” and “Legally Blonde.”

This year could be more problematic. One reason MGM decided to delay the release of its $110-million, John Woo-directed World War II drama “Windtalkers,” starring Nicolas Cage, to this year was to avoid having to record such a hefty production cost last year.

The release of another expensive and troubled production, “Rollerball,” directed by John McTiernan, was moved from last year to Feb. 8 when the studio recut the movie from an R-rating to a PG-13. And although the Bond films usually are sure hits, the upcoming production carries a hefty $125-million budget.

Overall, MGM’s box-office record in 2001 was mixed, with a market share of just 5.5%, well behind the other major studios. Its two biggest hits were “Hannibal,” which grossed $165 million domestically, and “Legally Blonde,” which grossed $96.5 million but cost $19 million to make.

Among its disappointments were “AntiTrust,” “What’s the Worst That Can Happen?,” starring Danny DeVito and Martin Lawrence, and “Bandits,” starring Bruce Willis.

Reacting to Monday’s news that MGM was shopping itself, several Wall Street money managers said they were skeptical any media company would pay the price Kerkorian wants.

“It seems like a very rich multiple,” said one hedge fund manager. “Who in their right mind is going to pay that?”

Yet, there are those who suggest that although companies may be balking at the $7-billion price tag, the scarcity value of MGM’s film library--the second largest in Hollywood next to Warner Bros.’--is something that potential bidders shouldn’t easily dismiss.

“The price is not unreasonable because there are no other libraries of this size and scope available today,” said Logsdon, who estimates the library generates more than $300 million in cash flow annually for MGM.

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Times staff writer Sallie Hofmeister contributed to this report.

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(TEXT OF INFOBOX)

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The MGM Script

* 1969: Financier Kirk Kerkorian buys a controlling interest in Metro-Goldwyn-Mayer, the fabled Hollywood studio that made such classics as “The Wizard of Oz,” “Singin’ in the Rain” and “Ben-Hur.”

* 1986: Kerkorian sells MGM to Ted Turner for $1.25 billion. But Turner’s financial squeeze prompts him to sell back $480 million of MGM assets to Kerkorian, including the United Artists label, the MGM name and famed lion logo. Turner keeps some 3,000 film titles, including “Gone With the Wind” and “The Wizard of Oz,” which he uses to help build his cable empire.

* 1990: Italian businessman Giancarlo Parretti buys the studio from Kerkorian for $1.3 billion. Within a year, lender Credit Lyonnais seizes the studio when Parretti fails to make his payments.

* 1996: Credit Lyonnais puts MGM up for sale. Kerkorian buys the studio for the third time for $1.3 billion with Australian broadcaster Seven Network, which he buys out two years later.

* 1996-present: Including his purchase price, Kerkorian sinks nearly $4 billion into the company, acquiring Orion Pictures and the film library of PolyGram. The company’s finances improve from cost cutting and profitable films such as “Hannibal” and “Legally Blonde.” MGM solicits alliances and bids for the company.

Little Progress

MGM shares have resurged recently, but at Tuesday’s closing price the stock is just 11% above its initial public offering price of $20 in November 1997.

Sources: Bloomberg News, MGM, Associated Press