There are lots of good reasons Time Warner should stay out of the hunt for movie studio MGM. They range from accounting investigations to the risk of souring revived investor confidence.
But Time Warner CEO Dick Parsons needs only one reason to pounce: Big film libraries don't come on the market very often.
Time Warner is talking to MGM about a $4.7 billion deal to buy the studio and its library of movies and TV shows. While this treasure trove could be used to feed Time Warner's portfolio of cable networks, the primary lure is exploiting all that product in the surging DVD market.
Time Warner has steered clear of the deal market for years, swamped by its battered stock price, shareholder lawsuits and investigations into accounting games by its America Online division. But, with the company's cable, network and publishing divisions on track, its music division sold, and AOL stabilizing, Parsons believes he can cope with the intense scrutiny of a midsize acquisition by regulators.
Fulcrum Capital media analyst Richard Greenfield would prefer to see Time Warner focus on operations, but he acknowledges that "you can't pick the timing of when assets come for sale."
Time Warner steps in as a three-month-old bid from a group led by electronics and movie giant Sony is faltering, with financial partners including Texas Pacific Group and Providence Equity Partners disagreeing on whether to pay up, according to industry executives familiar with the bidding. That's why Time Warner believes it can get away with paying less than the Sony group's $5 billion offer.
The executives say Time Warner's offer is tentative, hinging on detailed examination of MGM's library. NBC Universal is also looking at the company, they say, but has not made an offer.
Since all three suitors already own bigger studio operations, the lure is in the library, which includes 4,000 theatrical releases, including the James Bond series plus 10,400 episodes of such TV shows as The Addams Family, Fame and Green Acres.
Operationally, MGM is a DVD volcano. Because of its rich library, it collects five times more from DVD sales ($1.1 billion) than from theatrical revenues ($221 million). DVD revenue will taper off if MGM's studio side is shut down and stops feeding new titles into the pipeline. But, with high-definition DVDs on the horizon, video junkies will doubtless restart growth as they replace beloved films with the new format.
Revenue from selling movies and series to TV is still a big part of MGM's business, but it's shrinking. About 20% of MGM's revenues come from licensing movies to U.S. and international TV networks; another 10% comes from selling TV shows. In recent years, MGM's production of new TV product has dwindled, with Stargate SG-1 and Stargate Atlantis among the few remaining series.
Time Warner could exploit the MGM movies for its cable networks, like HBO, TNT, TBS and Turner Classic Movies. But it wouldn't likely use them to create a new network since the financial kick would be so small.