Why MGM are a tempting proposition for the circling media giants

In 1989, Patrick Swayze starred in "Road House," an action film about a bouncer with a philosophy major that quickly disappeared at the box office. But the movie has since gone on to become a cable-TV hit, airing 65 times from 1994 to 2002 with consistently strong ratings, reports the Wall Street Journal.

That's why television networks are still willing to pay as much as $600,000 for the right to air a film like "Road House" up to a dozen times a year. It's also a reminder of why Metro-Goldwyn-Mayer Inc., with its vast library of already-released movies, remains a prime acquisition target.

In recent weeks, the studio controlled by billionaire investor Kirk Kerkorian, 87, has been negotiating a possible sale with both Sony Corp. and Time Warner Inc., at an asking price of $3 billion plus assumption of $2 billion in debt. Other possible buyers, such as General Electric Co.'s NBC Universal, have also expressed interest.

MGM has changed hands six times in just over 30 years, three times to Mr. Kerkorian. In that time, the studio has made a science out of building up, then wringing cash from, old movies, even ones that otherwise would be long forgotten by now. Today DVDs, cable channels and other new technologies and outlets are providing huge sources of revenue for old movies, making film libraries more valuable than ever.

But in a fast-changing media landscape, these libraries also face risks. Some worry the Internet will allow piracy of old movies. Others believe film libraries have been hurt by the repeated airings of old movies on cable TV, eroding the popularity of movies on TV faster.

Even though MGM isn't a first-tier player in new movies, its library of more than 4,000 movies is one of Hollywood's biggest. "Instead of treating its library as the unwanted stepchild of movie production, MGM made it the No. 1 focus," says Chief Operating Officer Chris McGurk.

With production and marketing costs paid long ago, older movies can generate millions of dollars through DVD and video sales, as well as TV airings. They can be the foundation for new cable channels, the source for big-screen remakes or even unlikely projects, such as a Broadway version of "Legally Blonde" that's in the works. MGM is also considering a direct-to-video remake of "Road House."

These days, MGM's library generates about $400 million of cash flow a year. But the company still struggles with profitability. For the first quarter ended March 31, MGM posted a net loss of $21.3 million, which the company attributed largely to a noncash charge and a bad-debt charge. The loss was smaller than the year-earlier net loss of $55.8 million. MGM's revenue in the first period climbed 17 percent to $464 million.

Mr. Kerkorian, who declined to be interviewed, has built a fortune trading in and out of MGM over the years. He has bought and sold the studio at opportune moments to take advantage of the recycling of MGM movies on broadcast television and videocassette. Now he is looking to sell again as Hollywood's current golden egg, the DVD, nears its peak. About half of U.S. homes now have DVD players, most purchased in the last three years, according to DVD Entertainment Group, suggesting that the biggest period of growth may have passed.

MGM has mined its library more aggressively than most studios. It has released more than 1,000 titles on DVD, from "Moonstruck" and "Annie Hall" to "Dr. Goldfoot and the Bikini Machine," a 1965 spoof about a mad scientist who plots to take over the world with seductive female robots. Many of MGM's other titles have questionable value, including such films as "Robot Holocaust" and "Necropolis."

The value of film libraries came into focus during the 1960s, when movie mogul Lew Wasserman's MCA bought Paramount Pictures' library of films made before 1948. Until then, studios could reap long-term benefit from their libraries only by periodically reissuing hit movies in theaters. But Mr. Wasserman immediately made his money back by selling broadcast rights to TV networks.

Mr. Kerkorian has followed a similar game plan. Using money he made from a charter airline shuttling gamblers to Las Vegas, Mr. Kerkorian first bought a controlling stake in MGM in 1970. The once-great studio had fallen on hard times, but Mr. Kerkorian's timing was impeccable. The growth of color TV had made watching movies on television more popular. "People woke up and said a library can be used for other things besides storage in the vault," says Harold Vogel, a veteran film analyst.

In 1981, when home video was taking off, MGM spent $380 million to buy United Artists and its 900 titles, including the coveted James Bond franchise. By the early 1980s, home video and growing revenue from pay television were bringing new investors to Hollywood. Sensing opportunity, Mr. Kerkorian sold MGM to CNN founder Ted Turner for $1.5 billion in 1986. Mr. Turner wanted to use the films for his expanding empire of cable channels.

Mr. Turner's company, Turner Broadcasting, took on too much debt to complete the acquisition. He turned around that same year and sold everything -- except the MGM library. Turner still owns MGM movies made before 1986, including such classics as "Gone With the Wind" and "The Wizard of Oz." Mr. Kerkorian repurchased most of the studio assets and the MGM logo for $780 million.

He soon began looking to unload his shrunken company again. In 1990, he sold it to Italian financier Giancarlo Parretti for $1.7 billion, including debt. To help pay for the deal, Mr. Parretti's MGM sold off long-term rights to show its movies on television and distribute its videos. Within a year, Mr. Parretti's main lender, Credit Lyonnais, repossessed the studio.

In 1996, when the French bank put the studio on the block, who was there to grab the rebound? Mr. Kerkorian, who stepped in as part of a group with a winning $1.3 billion bid.

Buying MGM for the third time, Mr. Kerkorian made clear that he had little interest in making movies. Instead, MGM's management decided to bulk up the catalog of older movies. Kenneth McCormick, a former MGM executive and investment banker, says that Mr. Kerkorian once turned to him during negotiations over a film-library acquisition and commented that movies "just don't go down in value. ... Something new comes along that you can use them again."

Mr. Kerkorian made his first acquisition a few months later in 1997, paying $573 million, including debt, for the 2,200-title Metromedia library. The titles included hits produced by the bankrupt Orion company, including "Dances with Wolves," "Silence of the Lambs" and various Woody Allen films.

The explosion of cable-TV channels meant companies had hours of air time they needed to fill. Two former Orion titles now owned by MGM -- "Back to School," a Rodney Dangerfield comedy about a grown man accompanying his son to college, and Steve Martin's "Dirty Rotten Scoundrels" -- are broadcast on television more than almost any other movie, according to TBS analysis of Nielsen data. "Back to School" was shown 97 times on ad-supported cable TV between 1994 and 2002, mostly on Comedy Central.

In the space of two years, MGM tripled its library through acquisitions. Its collection now included hits such as "When Harry Met Sally," "Malice" and "Mr. Mom," as well as little-known movies like "Necropolis."

The next step for MGM was to turn its hodgepodge of titles into moneymakers. First, MGM had to spend months searching around the world for the actual film reels of some of the movies it now owned. Staffers found themselves riffling through chilled vaults and rambling archives around Europe.

The physical location of many of the studio's movies was so scattered at that time that a few were almost lost altogether. Other copies had been destroyed by fires over the years. Even today, MGM's titles are spread across America: from limestone mines in Pennsylvania to vaults in Culver City, Calif.

One of the next priorities was transferring dusty old reels to digital form, a first step to releasing movies on DVD. Not every title is worth such "re-mastering," which can cost as much as $25,000 per movie. Many of the films it acquired weren't expected to make enough new revenue to justify the cost. An MGM library task force met weekly to discuss which titles to re-master, which to release on DVD and how to work the library harder.

Soon MGM was churning out hordes of DVDs, often selling for a cut price at mass merchants such as Best Buy Co. When a major star had a new movie coming up, MGM would rerelease the star's previous works on DVD. Even titles without big-name stars, like 1987's "RoboCop," sometimes get a big push: Last month, MGM released a "RoboCop" boxed set of the movie and its two sequels. It has sold 150,000 units.

"Dr. Goldfoot and the Bikini Machine" was spruced up in a new box when it was released on DVD and marketed under the "MGM Midnite Movies" banner, along with "Attack of the Puppet People," a 1958 horror movie. MGM has marketed other titles under categories ranging from Soul Cinema to Avant-Garde.

Sprucing up classics with a few new features is often enough to generate profits. MGM released a "special edition" DVD of Clint Eastwood's 1966 "The Good, the Bad and the Ugly," including some deleted scenes, under a Western Legends banner in 2000. By the end of last year, that DVD had produced revenue of $6 million.

"We realized we could drive the value of the library by constantly repromoting and repackaging titles in new ways," says MGM's Mr. McGurk.

The archives are also being tapped for remakes. Next year, MGM is reviving its classic "The Pink Panther," this time starring Steve Martin. Bond movies, "Rocky" and "The Great Escape" have been mined for video games. The company has set up a special "MGM on Stage" division, licensing titles such as "Chitty Chitty Bang Bang" for the stage.


MGM also tied bonuses for its television and home-video salespeople to library revenue and cash flow. As a result, salespeople worked more aggressively to find TV outlets for the library. Paxson Communications Corp.'s Pax TV network, for instance, struck a deal with MGM last year permitting the network to air "MGM Night at the Movies" every Friday night.

MGM has long struggled with a bigger goal: using the library to start new cable channels in the U.S. MGM has watched other entertainment companies use its movies to build their own cable channels. Turner Broadcasting, now part of Time Warner, used its acquisition of the old MGM library to great effect. For instance, every Christmas Eve since 1997 it has aired a 24-hour marathon of the Turner-controlled MGM movie "A Christmas Story." In all, the 1983 evergreen aired 84 times between 1994 and 2002 on TNT.

MGM has had mixed results abroad, where it has channels in 110 territories, mostly with partners. In India, the Zee MGM channel started off showing old MGM movies on a schedule featuring "Thrilling Thursday" and "Romantic Monday." But rivals such as Showtime have been airing more recent Hollywood blockbusters, posing tough competition. That's something MGM can't do, given that it produces only a handful of more-modest movies each year. As a result, Zee MGM has started buying movies from other studios as well.

MGM is clearly at a big disadvantage to the major media conglomerates that own film studios. Warner Bros. parent Time Warner can use its cable systems to help launch new channels. Viacom Inc. Chairman Sumner Redstone estimates that 70 percent of the shows on Viacom's TV Land cable channel come from Paramount's library.

MGM approached most of the media heavyweights in the late 1990s about everything from full-blown mergers to more-modest deals for creating individual channels. At one point, Mr. Kerkorian had dinner with Mr. Redstone to discuss a possible deal, according to a person familiar with the situation. The talks didn't get very far: Viacom executives thought MGM put too high a value on its library. Disagreements over value of the library scuttled talks with Sony, parent of the Columbia Pictures film studio, and Time Warner's Warner Bros. MGM had numerous talks with Liberty Media, owner of the Starz Encore pay movie service that licensed lots of MGM titles for its channels.

"We turned over every stone. We had conversations with everybody who had distribution," says Mr. McCormick, the former MGM executive, who joined the company briefly in 1999 after several years as its main investment banker. There was one big problem: Mr. Kerkorian wouldn't give up control of MGM, people involved with the talks say.

But with DVD revenues peaking, the potential buyers are back, eager for more movies to ram through their own home-video divisions and any future platforms that will come along. This has given Mr. Kerkorian one more chance to cash out of MGM.

Thanks to `Ross` for the alert.

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