MGM Comes to End of Rainbow7/06/2003 08:00:00 PM Eastern
Revenues at Rainbow Media's entertainment networks are expected to run approximately 37% higher this year than in 2001, the year MGM bought 20% of the operation. Earnings could be about 72% higher.
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|Source: Merrill Lynch analyst Jessica Reif Cohen|
Despite that strong growth, MGM last week acknowledged that it will wind up booking a stiff loss on its two-year effort to use Rainbow as its entrée into the cable-network business and will sell the stake back to Rainbow parent Cablevision.
MGM's agreement to sell its Rainbow stake last week had Wall Street and industry executives howling, not only because MGM agreed to such unfavorable terms but because seemingly everyone outside of the studio spotted problems in the original deal the minute it was cut.
Although MGM talked of hoping to eventually buy Rainbow's AMC, WE: Women's Entertainment or IFC networks, the terms of the original deal offered no particular path to such an acquisition. MGM Chairman and Chief Executive Officer Alex Yemenidjian envisioned the investment's leading to extensive collaboration between the studio (with its library of 4,000 movies) and the networks and eventually to full ownership. But nothing like that was outlined in the partnership agreement, and MGM found the investment as annoyingly passive as pretty much every media executive outside MGM always assumed it would be. MGM did not even have a voice in such major issues as the sale of Rainbow network Bravo to NBC last December.
And even though MGM collected $250 million for its share in Bravo, the studio will nevertheless take a $93 million loss on its initial $850 million investment.
Cablevision will pay only $500 million for MGM's stake in the remaining networks. MGM has collected some dividends from them but has also incurred some expense.
Cablevision "is buying at 14 times cash flow a stake that it sold for 24 times cash flow two years ago," said one industry executive involved in the deal.
The odd thing is that Cablevision and MGM are competing for Vivendi, Cablevision backing a group led by Edgar Bronfman Jr. So the Rainbow deal means that Cablevision Chairman Chuck Dolan is selling bullets to the enemy. An executive in Bronfman's investor group, though, said that "we're totally comfortable" with the Dolan/MGM deal.
Industry executives said MGM sold its Rainbow stake for so little because the studio is seen as a weak bidder for Vivendi and Yemenidjian yearns to cut a deal to make MGM into a major-league Hollywood player.
"It was a fire sale," said one industry executive involved in the deal. "They wanted the money to bid for Vivendi."
But Bear, Stearns & Co. media analyst Ray Katz said that was only part of the equation. Yemenidjian and controlling shareholder Kirk Kirkorian were frustrated that the investment had led to nothing else: no acquisitions, no management say, not even any meaningful supply deals between the studio and the Rainbow networks.
"You could tell things were going wrong the first year, because there were no more MGM movies on AMC than there had been," Katz said. "Vivendi is a second or third factor. If there were no Vivendi auction, MGM would still want to get out of this deal."
MGM boasts that selling Rainbow will leave the company debt-free (which it would have been much earlier if it hadn't paid $850 million for it in the first place).
"We are turning an asset for which the financial community gave us little credit into over $2 per share in cash," Yemenidjian said. "Upon completion of the transaction, our balance sheet will be 100% debt-free, which will give us more flexibility in pursuing other value-creation opportunities for our shareholders."