|Shares Out. (in M):||54||P/E||0||0|
|Market Cap (in $M):||4,200||P/FCF||0||0|
|Net Debt (in $M):||-60||EBIT||440||475|
MGM Studios presents a compelling opportunity with strong downside protection stemming from a robust content library. At fair value, we think the equity trade to the $150 context by year end '17 (a +90% upside from current prices).
The investment thesis here is fairly straight forward:
Content is King: Over the past several years, and essentially since Anchorage and other distressed investors had the pleasure of taking over the Company through a LBO-gone-bad prepack (that whole mid-2000s DVD thesis didn’t really pan out), content has become increasingly important as there are more and more ways of exploiting TV & video libraries across various outlets. This logically includes the usual cable companies, but now has been firmly expanded to include the likes of Netflix, Amazon, Hulu, and a host of other US and international distribution platforms. MGM has a significant content library that generated ~$315mm of EBITDA last year, up 9% from 2014. Library EBITDA has a significant cash conversion ratio, as this essentially represents licensing deals for existing film content. We see significant Library value underpinning the current trading price, which implies less reliance on future blockbuster successes (a key risk in any film production company).
Cheap to Comps: MGM is a private company. With no coverage and hurdles / limitations to ownership of the Class A stock, MGM trades very cheap to comps (almost ridiculously so). We estimate that the company trades at ~8.5x 2016E EBITDA, versus comps that trade into the mid-high teens. Lions Gate, one of MGM’s closer comps, trades at +14.5x forward EBITDA. That would imply a MGM price of ~$135, more than 70% above last. Comcast recently bought Dreamworks for $3.8 billion, or ~17.5x EBITDA based on the Bloomberg estimates.
Aggressive / Active Management: The Company continues to generate a compelling amount of free cashflow, which management is reinvesting into new films, additional content-generative JVs, and shareholder-friendly buybacks. In 2015, the Company deployed $300mm into share repurchases; since 2012, the company has repurchased in excess of $1 billion of stock. Management recently announced another $300m of share repurchases (equating to +7% of the current market cap). As such, management and key shareholders are aggressively exploiting the valuation arbitrage by minimizing the share count (and boosting their respective ownership) prior to an eventual exit at a much higher multiple.
Multiple Natural Purchasers: A key concern with owning a private business is liquidity and the ability to ultimately exit your investment. We see this as short/medium term risk here as there are a multitude of exit strategies. We expect the Company will eventually go public or will be sold to a firm like Amazon, Disney, or another company looking to enhance its content slate. It’s important to emphasize how small this business in the context of potential acquirers. For example, at $100.00 per share, the MGM’s enterprise value is still only ~$5 billion.
Valuation and Target
Modeling out a film production company is exceptionally difficult. The financials are convoluted with a variety of film-specific accounting rules, and across the industry there is an underlying theme of secrecy and obfuscation. Film companies don’t want to publicize how much money they make, as that will only lead to harder bargaining among actors and other participants in the industry. This, for example, is why you’ll hear about how much a Bond film grossed at the theatres, but finding public (unleaked) data with specifics beyond that is exceedingly difficult.
As such, we rely on high level EBITDA to discuss valuation, and we don’t focus on projected revenues / costs, etc. Additionally, while the library EBITDA is by far the largest driver of profitability, there is certainly lumpiness associated with new blockbuster films, etc. MGM’s management has recently improved its own reporting and discussion of various elements of the business, which is helpful to investors trying to get underneath the hood and moreover increases speculation that they may be getting closer to sell /IPO the business.
Based on our estimates, we believe the Company is trading at approximately 8.5x forward EV/EBITDA. Comps trade in the 8x-30x forward EBITDA. We show the implied valuation below, including a value at our target of 12.5x EBITDA (a few turns below its closest comp).
\We think a 12.5-15.0x LTM multiple is reasonable; assuming some EBITDA growth through 2017, we see a 2016 price range of ~$114-$137 per share, and a 2017 value of ~$130-$150 per share.
MGM has a robust library with high value franchise assets including James Bond, Hobbit, and Rocky. Management enters into ongoing licensing agreements with various customers with this content, which produces a constant stream of cash for the Company. Anecdotally, content libraries can easily go for +15x EBITDA. Per the calculation below, MGM’s content library essentially supports the current stock price, which indicates significant downside protection from here.
MGM Holdings Inc. (“MGM” or the “Company”) is a leading entertainment company focused on the production and distribution of film and television content globally. The Company has one of the most well-known brands in the industry with globally recognized film franchises and TV content, including a broad collection IP and commercially successful content.
MGM generates revenue from the exploitation of its content through traditional distribution platforms, including theatrical, home entertainment and television, with increasing contribution from digital distribution platforms in existing and emerging markets. Its operations include the development, production, and financing of feature films and television content and worldwide distribution of entertainment content primarily through TV and digital distribution. In addition, the Company owns 100% of United Artists Media Group (UAGM), which was previously a JV with Mark Burnett, Roma Downey, and Hearst Production to develop premium TV & film content across all platforms, as well as a 19% stake in EPIX (a JV with Viacom, Paramount, and Lions Gate).
MGM holds a deep library of film and TV content, including James Bond, Hobbit, RoboCop, Pink Panther, Rocky, and 21 Jump Street franchises, as well as Silence of the Lambs, Magnificent Seven, Westside Story, and Four Weddings and a Funeral. The Company’s key TV assets include Stargate SG-1 (and other Stargate series), Vikings, Fargo, Fame, American Gladiators, Teen Wolf, and In the Heat of the Night.
In 2005, a consortium including Sony, Providence Equity, TPG, DLJ Merchant Banking, and Quadrangle acquired MGM for $5 billion. From our review of the Company’s 2010 Disclosure Statement (hint: the investment did not go well), MGM was hit with a few issues in addition to the general Great Recession rationale for business underperformance:
(i) DVD sales, which grew from $388 million in 2001 to $911 million in 2004 and were at that point a very significant part of the business, basically cratered. Revenues from blu ray never fully materialized and DVD sales (according to various web sources) fell to under $50mm.
(ii) The Company failed to produce a much needed blockbuster and moreover the studio was hindered from fully investing in new features due to an onerous interest expense burden.
The Company went through a prepackaged bankruptcy in 2010 with Anchorage Advisors, Highland Capital Management, and Davidson Kempner holding large amounts of MGM equity post reorg. Anchorage continues to control a significant portion of the equity, with ongoing board representation.
We highlight here that MGM is still a private company and investors need certain levels of accreditation to purchase equity units. The financials are posted to the company's IR website - http://www.mgm.com/#/about/investor-relations
1.) Sale of the business or IPO.
2.) anticipated additional buybacks.
3) additional blockbusters (next installment of Bond, for example), as well as new TV shows and accretive JV activities (particularly around television).