Bids were due yesterday for the most prestigious movie studio of the '90s—but there were few takers. The Daily Beast's Peter Lauria on why Miramax and MGM are suddenly worth so little.
Once upon a time, not too long ago, fierce bidding wars erupted whenever a Hollywood studio came up for sale. Sumner Redstone and Barry Diller famously dueled over Paramount Communications in the early '90s, for instance, eventually pushing the purchase price for that studio above $10 billion. Six years ago, a group of private-equity funds outbid Time Warner to acquire Metro-Goldwyn-Mayer for more than $5 billion. More recently, India's Reliance Big Entertainment agreed to supply DreamWorks with roughly $1 billion in funding to break away from Viacom.
For sellers, however, financial fairy tales like this no longer exist in Hollywood. Despite twice extending the final date, only two lowish offers were expected to be submitted by Monday's deadline in Disney's Miramax auction, one of them by the founding Weinstein brothers. MGM, which has been trying to sell itself since late last year, set a new date of May 14 for bids, though bankruptcy appears more likely than a sale at this point.
“The metaphor we always use for film libraries is that they are melting ice cubes.”
Lionsgate looked at both Miramax, whose stable of films includes Pulp Fiction, Chicago, and Shakespeare in Love, and MGM, which owns the rights to the James Bond, Pink Panther and Rocky franchises, among others, but passed on both. So did Summit Entertainment, former Artisan Entertainment CEO Amir Malin's Qualia Capital, News Corp., Peter Chernin, Terry Semel and a host of others. All of them found the sellers' asking price far too rich. While Disney wants between $600 million and $700 million for Miramax, analysts say it's worth less than $500 million. MGM's creditors want $2 billion, but the company's value has fallen so precipitously in the past four years that the most lucrative offer they've gotten has been the $1.5 billion offered by Time Warner, which was prepared to pay $5 billion for MGM in 2004.
Part of the reason for the bid-ask gap stems from the fact that calling Miramax or MGM a "studio" is a misnomer. Fully operational studios rely on both original production and film libraries (i.e., older movies that have had their theatrical run, but generate revenue through DVD and television deals). Miramax stopped making movies in October, and MGM has essentially halted new production, releasing only one film last year, Fame, and only one so far this year, Hot Tub Time Machine. Both companies are solely library plays, and the value of movie studio libraries has fallen victim to diminishing returns.
Therein lies the problem with both auctions—without original productions, a film library is essentially a depreciating asset. But ramping up original production is both time-consuming and capital intensive—and there's no guarantee of a return on investment. Quite the opposite, in fact, as any buyer looking to restart production is also looking at potentially losing millions of dollars as well.
"The metaphor we always use for film libraries is that they are melting ice cubes," says Bill Mechanic, the former head of 20th Century Fox, who now runs his own production company, Pandemonium Films. "The newest stuff is always of the greatest value. As a film library ages, it gets pulled along by what's new."
Studios exploit film libraries the way a cable network launches new channels, just in reverse. News Corp., for instance, is able to get distribution for the nascent Fox Business Network by bundling those channels with the already established Fox News or FX. Having already exploited Good Will Hunting in various formats, the only way Miramax could generate more revenue from that film is to bundle it with new movies and sell the licensing rights as a package to television networks or retail outlets such as Wal-Mart.
"Without new movies, a library is like a store with old inventory," says Mechanic. "Last year's fashions are still worth something, but you get more value by offering both."
As the pace of digital technology quickens, the ice cube melts faster.
Cable networks once relied on movies to fill out their programming schedules and DVD purchases were increasing by double-digits year after year. Now, however, basic cable networks like AMC and pay-networks such as HBO are moving away from films to commission their own original productions. At the same time, the transition to digital distribution has prompted a downward spiral in the DVD market, with sales falling 13 percent last year, the second year in a row, to $8.7 billion from $10 billion, according to Adams Media Research.
Such market forces make ramping up original production even more important for Miramax and MGM.
"The only way for a buyer to get maximum value from either of these studios is to begin operating them again," says Jim Janowitz, chairman of the entertainment practice at Pryor Cashman. That's unlikely to happen with Miramax, however, and sources say that if Disney doesn't get the price it wants, it will simply pull the company off the block and "hang on to it for another day," an orphan of depreciating value inside the Magic Kingdom's movie-making apparatus.
Conversely, MGM's creditors, who essentially own the company by virtue of controlling its $4 billion in debt, are contemplating a restructuring plan that would convert their debt to equity through a pre-packaged bankruptcy as well as bring on an investor to infuse the company with cash to begin making six to eight movies per year. This seems to be the most likely course of action, as MGM's creditors would rather double down than take a loss of upward of $1 billion on their investment. And while Mary Parent already oversees all of MGM's motion-picture development, sources familiar with the process say the company is interested in talking to former studio bosses Chernin, Semel, and Dick Cook, who was ousted from Disney last September after tensions with CEO Bob Iger, about a management position.
Peter Lauria is senior correspondent covering business, media, and entertainment for The Daily Beast. He previously covered music, movies, television, cable, radio, and corporate media as a business reporter for The New York Post. His work has also appeared in Avenue, Blender, Black Men, and Media Magazine, and he's appeared on CNBC, Bloomberg, BBC Radio, and Reuters TV.