CORPORATE FOCUS—Rejuvenated MGM Retains Luster Despite Fall in Stock

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After enjoying nearly a 50 percent run-up early this year, Metro-Goldwyn- Mayer Inc.’s stock had given back almost all of that gain as of last week.

Nonetheless, entertainment industry analysts remain bullish on the company, attributing the downturn to a sectorwide selloff, as investors flee an industry notorious for having unpredictable revenue streams.

The downturn is only temporary for MGM, several analysts agreed, pointing to the studio’s a new management team, stellar box-office revenues, a retooled distribution system and a well-received equity investment.

“The later half of the year bodes very well for the stock, especially as cash flows from recent investments start coming in,” said David W. Miller, an analyst Sutro & Co.

MGM is coming off the most profitable year in its 76-year history, and it generated record revenue for the first two months of 2001, according to a company spokesman.

The cash flows are nothing to sneeze at. Anthony Hopkins’ gore-fest, “Hannibal,” is enjoying the third largest opening of all time, raking in worldwide grosses of $250 million as of last week.

And on April 22, MGM closed on its purchase of a 20 percent, $825 million stake in four of Rainbow Media Holdings Inc.’s national cable channels American Movie Classics, Bravo, The Independent Film Channel, and We: Women’s Entertainment.

MGM’s fourth-quarter performance wasn’t great. For the three months ended Dec. 31, it reported net income of $12.4 million (6 cents per diluted share), down from net income of $15.2 million (8 cents a share) in the like year-earlier quarter.

Fourth quarter revenues were $281.9 million vs. $372.2 million in the fourth quarter of 1999.

Similarly, the stock performance was lackluster in the fourth quarter, with shares hitting a 52-week low $14.88 in December. As of last week, they were in $17-a-share range, and analysts say brighter days lie ahead.

“It’s a great story,” said Miller. “After decades of red ink, a new management team is making a remarkable turnaround. All cylinders are firing.”

Since their arrival at MGM in April 1999, CEO and Chairman Alex Yemenidijan, Vice Chairman Christopher J. McGurk and CFO Daniel Taylor have undertaken several major initiatives.

They’ve restructured the company’s distribution methods, cutting overhead by 50 percent as they bring control of worldwide product distribution in-house.

“For the first time in decades, we’re in control of our own product,” said Taylor, adding that “the transition comes at the perfect time to take advantage of the exploding DVD market.”

Starting with 75 titles in 1999, the company put out 135 DVD titles in 2000 and plans to distribute 300 more titles in 2001. And MGM is in position to keep augmenting those numbers. It owns the largest modern (post-1948) film library, with 4,100 titles blowing away its closest competitor, AOL Time Warner’s Warner Bros. library, which contains less than half that number.

“We’re leveraging off our strong library cash flow to make carefully crafted creative and financial decisions with the movies we release,” said Taylor.

He went on to cite a low-cost strategy for the studio’s movies and financing structures that allow the company to minimize its downside risks while continuing to share in the upside of potential blockbusters.

“We’re not forcing movies through the greenlight process,” he said.

The company now looks generally to pre-sell or split foreign rights to distribute its MGM or United Artists brand movies, as it did with Universal Studios on “Hannibal.” This and other financial tools mean that the studio’s average film budget comes in at a $40 million, well below the industry average of $55 million.

This represents a major departure from past ways.

“Frank Mancuso (the former CEO) green-lighted only the films that he liked,” said Miller. “That’s not the way it works. You have to consult all sides of the studio.”

MGM has 20 pictures set for release in 2001, featuring major stars like Bruce Willis and Sigourney Weaver and teen favorites like Chris Klein and Reese Witherspoon. Company executives and several industry observers agree it’s the strongest MGM slate in the past 10 years.

In addition, the company has instituted new employee policies. It has put in place an incentive plan and handed out 100 MGM shares to every employee.

The acquisition of a stake in Rainbow Media’s cable channels is seen as an opportunity for MGM to implement a vertical integration strategy.

“We’d like to build up our stake in Rainbow,” Taylor said.

Taylor termed 2000 “a transition year” for the studio.

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