Description

Brief Introduction

MGM Holdings Inc. (MBMB, or “MGM”) is an entertainment company focused on the production and global distribution of film and television content across all platforms. MGM is among the largest independent studios in Hollywood and owns significant intellectual property (“IP”) in the form of film franchises and television content. Key properties are summarized below.

Film library: 

• Library size: ~4K titles

• Selected franchises (all or partial ownership): James Bond, The Hobbit, Rocky/Creed, RoboCop, Pink Panther

• Accolades: 180 Academy Awards, including 12 Best Picture Awards

TV library:

• Library size: ~17K episodes 

• Selected titles: Stargate SG-1, Stargate Atlantis, Stargate Universe, Vikings, Fargo, The Handmaid’s Tale, Get Shorty, Condor, Fame, American Gladiators, Teen Wolf, In the Heat of the Night

• Other partial rights: The Voice, Survivor, Shark Tank, Live PD and Live Rescue, Eco-Challenge, Are You Smarter Than a 5th Grader?, Beat Shazam, The Real Housewives of Beverly Hills, The Hills

Distribution:

• EPIX: premium pay TV network delivering content in linear and on video-on-demand (“VOD”) services (its own and licensing to others) in the US and Puerto Rico

• EPIX NOW: standalone subscription streaming service ($6/month)

• MGM-branded channels in the US

• Interests in pay TV networks in the US and Brazil 

Recent History and MGM Challenges

MGM’s library has long been seen as under-monetized. Its buyout of EPIX partners, Viacom and Lionsgate, in 2017 exemplified this, as it was one of many attempts to control and expand distribution of MGM’s vast library. As larger competitors with significant libraries, including Netflix, Disney/Hulu, Amazon Prime Video, Time Warner/HBO, NBCU/Peacock, and ViacomCBS/Paramount/Showtime, have consolidated rights by reclaiming licensed content, acquiring original content, and boosting their libraries with other licensed content, they have increasingly gained shares of consumers’ eyeballs and wallets. MGM content, as part of the ‘other licensed content’ bucket, has benefited from some of the domination of these platforms, yet has not benefited as MGM might have hoped from its own vertically-integrated distribution channel, EPIX/EPIX NOW, which has remained an afterthought to consumers.

As the “streaming war” between these large competitors intensifies and they seek to expand their libraries, MGM has regularly come up as a potential acquisition target. Just earlier this year, it was reported that MGM was in discussions to sell. Most notably, MGM was rumored in 2018 to have received a bid from Apple, Inc. (which now owns/runs AppleTV+) for $6B, or $120/share, until MGM’s Chairman, Kevin Ulrich, fired then-CEO Gary Barber for the unsanctioned sale discussion — particularly relevant given Ulrich suggested to investors MGM would be worth $8B+ in 2-3 years.

Catalysts

As discussed above, a sale of MGM will be the key catalyst.

But why now?

Streaming war

After years of organizing a response to Netflix, it has only been in the past year or so that several large competitors have released their flagship streaming service; this includes Disney+, AppleTV+, HBO Max, and Peacock, with ViacomCBS’s Paramount+ on the horizon. Among independent libraries/IP/distribution combos, only Lionsgate/Hunger Games/Starz is comparable in size/recognition as the MGM/Bond/EPIX combo. For this reason, any sign of an MGM sale will likely sound the alarm for a competitive auction. 

Bankers have been hired

The alarm has been sounded — just this week, on December 21, 2020, it was reported that MGM has hired Morgan Stanley and Liontree to run a sale process.

‘Bond’ value

The next Bond film, No Time to Die, is completed but has been delayed for theatrical release until April 2021 (for now) due to COVID-19. A buyer will receive MGM’s economics from this film’s highly valuable first window by acquiring MGM before the film’s theatrical release. Alternatively, a buyer could release the film directly onto its streaming service to drive subscriptions.

Issues at top shareholder Anchorage Capital

Chairman Kevin Ulrich’s Anchorage Capital, MGM’s largest shareholder, has recently experienced subpar performance and outflows, which has in turn increased MGM’s sizing in the fund and made the fund less liquid overall. Monetization, especially at a significant premium, can help these issues.

Linear experimentation

EPIX could provide an interesting experiment for streamers with large libraries, such as Netflix, which has only recently been rumored to have interest in linear distribution given a common challenge to engagement: subscribers enter the app, browse endlessly, and never select/watch a program.

Valuation

From the foiled sale attempt to Apple in 2016, we already have one data point for a potential bid: $120/share. Given today’s capital structure, the acquisition is by no means cheap on a multiples basis; however, it becomes significantly cheaper when factoring in potential cost savings. These considerations are less relevant given who the likely buyers are (i.e., mostly tech/media giants with near-unlimited, cheap capital). With this in mind, it’s fair to assume investors can achieve a reasonable reward in a short period of time.

See below for a sensitivity of purchase prices/multiples:

Key Risks

• The auction is less crowded than anticipated

• Bids are conservative

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Catalyst

Sale of the company