MGM Stays the Course Despite Debt and Downgrades

MGM Stays the Course Despite Debt and Downgrades
MGM is in talks to be acquired by Inc.

Midway through an ambitious rebuilding effort, MGM Holdings Inc. finds itself at a crossroads. 

The iconic entertainment company’s pricey initiative to invest internally has been interrupted by the Covid-19 pandemic. And that, in turn, has pushed back MGM’s ability to monetize costly new content as its heavy debt load continues to grow.

In a downgrade of MGM’s corporate credit rating on Oct. 21, S&P Global Ratings said it “expects cash flow to be negative in 2020 before improving toward the second half of next year” while facing elevated corporate debt. 

S&P lowered MGM from a B+ rating to a B rating, meaning the company ranks in the midpoint in the speculative section. 

On a positive note, though, the credit rating agency said MGM’s outlook is stable and the company “currently has the capacity to meet financial commitments.”

At this point, the Beverly Hills-based film and TV studio has several options. 

The first is that MGM can push ahead with its recently reaffirmed invest-and-build plan. Or, it can pursue a sale that would likely have buyers lining up. Another possibility is to reshuffle ownership to cash out stakeholders who want a fast off-ramp.

For now, MGM — parent of the Metro-Goldwyn-Mayer Studios Inc. — is sticking with the build-it-yourself route. 

“The pandemic has reinforced the value of our (film and TV library) and validated our production strategy,” MGM Chief Operating Officer Chris Brearton said in an Aug. 13 stockholder conference call.

Brearton said that the bread-and-butter business of licensing existing titles in the MGM library to TV outlets is riding high during the pandemic. Off-the-shelf programming “now more than ever (helps) fill the gaps in their programming schedules. Based on first half of the year results, we now expect the library to outperform our expectations for the year (for MGM earnings), playing a critical role in mitigating the impact from production delays.”

Extensive library

The company’s library is vast, with more than 4,000 theatrical films and 17,000-plus episodes of TV shows. The foundation is the historic United Artists catalog, which includes the James Bond movies, the “Rocky” titles and numerous Oscar-winning films. (The historic MGM library, meanwhile, which includes “Gone with the Wind” and “The Wizard of Oz,” is held by Warner Bros., which is owned by AT&T Inc.) 

MGM, whose world-famous corporate signature is its roaring lion, is a onetime major studio founded 96 years ago that today rates as a large Hollywood independent.

MGM’s leading investor, Anchorage Capital Partners — which reportedly holds a 32% stake in the studio — is said to be calling the shots. 

Kevin Ulrich, Anchorage’s New York-based chief executive, is also MGM’s chairman. He is said to be hands-on and mixes directly in the Hollywood business and social scene. Ulrich declined a request to comment for this story.

Another notable MGM shareholder is Dallas-based Highland Capital Management. The investment firm’s co-founder, James Dondero, is a member of MGM’s board. Anchorage and Highland focus on distressed and alternative investments.

Other investment companies with equity stakes in MGM that each surpass 10% are New York-based Davidson Kempner Capital Management and Colorado-based Owl Creek Partners.

Another financier who is an MGM board member is David Krane, managing partner at GV, a venture capital arm related to Alphabet Inc.’s Google. GV is not an MGM shareholder.

Financial firms acquired ownership of MGM out of a 2010 bankruptcy. There have been reports recently of friction among stockholders about the company’s capital-intensive commitment to new content. Investment firms, which typically sell after three to five years, are also grappling with MGM’s extended timeline.

MGM is closely held with thinly traded stock. At a recent price quote of $84.50 a share, MGM carries a market valuation of $3.6 billion, based on 43.1 million basic weighted shares outstanding. 

Share prices for MGM have ranged from $17 in 2010 when the company was emerging from bankruptcy to $120 in 2018 amid speculation that the company would be sold for $8 billion — a figure that today seems out of reach.

Potential buyers

If MGM were to consider a sale, potential buyers reportedly include Apple Inc., Inc., Facebook Inc. and Universal Pictures owner Comcast Corp.

For any possible suitor, the main attraction would be adding MGM’s library to its own video streaming platforms. Hollywood’s major studios are now withholding their own library titles for use on in-house video-streaming services. MGM is also battling in that streaming space with its premium pay cable TV service Epix.

For MGM, the front-and-center issue is its growing debt load. For its second quarter ended June 30, MGM reported that corporate debt swelled to $2.3 billion, up from $1.8 billion in just six months. 

MGM is spending upwards of $1 billion a year on new content, though MGM Chief Financial Officer Ken Kay told the shareholders call in August that content spend in 2020 will be “$750 to $800 million, down from the $900 million estimate we provided in March” due to pandemic disrupting production schedules.

Kay added that “we expect that much of this current year savings is just deferred and will carry over to next year.”

MGM has a cushion of $755 million in cash on hand and $280 million in available credit from an existing revolving credit line, as of its August shareholder conference call. 

Although cash in corporate coffers is sizable, content production has voracious capital needs. Finding collateral for additional borrowing would be difficult because MGM pledged a senior security interest in substantially all its assets for its amended revolving credit facility, per disclosure filings.

Commencing distribution of spy thriller “No Time to Die” — the 25th James Bond movie — would unleash a financial windfall and ease debt pressures. But the 007 spy film starring Daniel Craig is languishing on the shelf.

The pandemic has already forced two delays in the movie’s domestic theatrical premiere, which is now scheduled for April 2, 2021. The highly anticipated action film is thought to have cost at minimum $250 million, and the studio has already spent tens of millions of additional dollars in marketing costs around the aborted premiere dates.

In October, reports circulated that MGM was sounding out streaming services for the opportunity to license “No Time to Die” for $600 million, presumably for a one-year window that skips the theatrical premiere. 

But that direct-to-streaming conversation seems to have been shelved after no deal materialized. The movie remains on the industry’s theatrical release schedule.

Mixed results

For the six months ended June 30 — a period half out and half in on the pandemic slowdown — MGM reported decent earnings, helped by the nonrecurring “significant SVOD licensing revenue for our ‘Vikings’ television (series) franchise.” 

Bottom-line net income was a positive $5.2 million, bouncing back from a loss of $7.1 million in the same six-month period a year earlier. A proxy for cash flow, adjusted EBITDA jumped 33% to $150.7 million. Revenue climbed 4% to $753.1 million.
In more recent developments, MGM in October sold its two small TV broadcasting networks This TV and Light TV to Allen Media Group, a Century City-based diversified TV media conglomerate led by Byron Allen. 

Separately, MGM’s nonmaterial investment in vaunted video-shorts startup Quibi soured when the disappointing streaming platform announced in October that it would be closing up shop.

Those developments pale in the comparison to the big-ticket drama surrounding monetizing MGM’s sizeable investment in “No Time to Die” and whether MGM shareholders get restless. MGM has many paths forward in the world turned topsy-turvy by the pandemic battered business.

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