What's Next For MGM?

MGM Studios
MGM Studios

Historic studio MGM has been the subject of lots of rumors and speculation about its financial health.

Back in 2004 a couple of companies, including Sony, Comcast, TPG Capital, and Providence Equity paid $5 billion in cash and debt for the studio. Now the concern is that the company isn't able to keep up with the payments on its $3.7 billion in debt. So what now: Will the Lion have to restructure its debt? File for Chapter 11? MGM aimed to put some of those fears to bed when it released an audit option to its lenders and the press, saying "MGM is in full compliance with all its debt covenants." The next payment on its revolving credit is $250 million due in April 2010, the $3.7 billion in term debt is due in June 2012.

MGM's greatest asset is its huge library of films, which throw off cash from DVD sales. Due to the decline in the DVD business this asset is worth less than it once was. But the Bank of Montreal reportedly valued MGM's library (over 4,000 titles) at higher than the $5.5 billion its term loan requires. That should indicate that the company won't default on its term loan, but it doesn't address the issue of how MGM's going to cover the upcoming $250 million payment. Hence the fears that the studio may have to file for Chapter 11.

The potential problem? MGM has been spending money on film development, production and marketing costs for upcoming films, even making some of the movies in its slate with money from United Artist's (Tom Cruise's co.) deal with Merrill Lynch. But, MGM hasn't had any cash flow from new films since "Valkyrie" in December 2008. MGM's next film is "Fame" coming out on September 25. There are two more films scheduled for release in February, the next films after that aren't out until October. Plus, MGM will need to spend significant sums to release these films: $30 to $40 million is the normal range for a mid-budgeted studio flick.

Will these three films generate enough profit for MGM to cover the $250 million they'll owe in April? The film business is cash flow negative, meaning that the studio pays hundreds of millions of dollars to produce, advertise and release movies, only breaking even up to a year later when DVD and pay-TV payments come in. So it's certainly possible that MGM won't have made $250 million from those three films and the cash its film library will throw off in the interim.

Would anyone want to buy MGM? The assets include its library, rights to brands like James Bond and Robocop, and the rights to co-finance the two Hobbit movies. Perhaps, but given the marketplace and the difficulty for anyone to raise debt, MGM is unlikely to sell unless it's absolutely forced to. For now MGM is likely looking to co-finance its movies with other studios or look for outside funds from the likes of hedge fund-backed Relativity.

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