MGM Wins in Talk of a Sony Deal

As a Hollywood studio, Metro-Goldwyn-Mayer Inc. can proudly claim to be in the fantasy business. But none of the fantasies MGM has put on-screen recently seems capable of generating quite as much instant value as the yarn it has spun over the last two weeks regarding a putative buyout offer from Sony Corp.

As wholesaled on April 21 by Reuters News Service, the story is that Sony has “initiated� talks with MGM aimed at a $5-billion takeover, and that the talks have reached an “advanced� stage.

Reuters, which quoted no principal at MGM or Sony by name, went on to speculate that the Japanese media conglomerate coveted MGM largely because its huge library of classic films could produce DVD revenue of millions of dollars a year.

The report created a sizable ripple. The price of MGM shares shot up by nearly 12%. Time Warner Inc., which had previously kicked MGM’s tires and passed, stirred itself to take another look, feeding another round of speculation.

The Reuters dispatch was followed by articles in the Wall Street Journal and the New York Times, which similarly speculated on the synergies to be exploited by a Sony-MGM marriage. (This newspaper wrote a small item on the stock’s rise, but it noted that sources close to the situation downplayed that a deal was imminent.)

Now, it’s entirely possible that Reuters pulled off a grand journalistic coup by breaking the story of a glamorous media deal at exactly the moment when the participants, if the negotiations were genuine, would have had maximum incentive to keep things very quiet.

Dane Hamilton, the lead writer on the original Reuters dispatch, assures me his sources are reliable. “We don’t run things unless we’re 100% sure,� he told me, which is so blunt an expression of self-confidence I’m surprised Reuters doesn’t offer a money-back guarantee.

It’s not inconceivable that in the coming days or weeks, Sony and the two investment firms reported to be its partners in the deal will actually buy MGM. The Japanese giant would surely find it a good strategic fit, and MGM has been on the block seemingly since Gary Cooper was in diapers.

But considering MGM’s recent history and the known desires of its principal owner, Kirk Kerkorian, to fill his pockets, it’s also possible that Reuters has been played for a sucker. There are plenty of indications that talk of a Sony-MGM deal is highly premature. Sony has just begun a serious review of MGM’s books, sources say, and hasn’t yet begun actual negotiations. What’s more, $5 billion -- Kerkorian’s asking price -- is in many eyes an inflated value for his declining studio.

A close reading of the press coverage should leave little doubt that the party that has been pushing the story along is MGM itself. We can determine this by applying a hoary journalistic principle known as “following the money,� also known as: “Who gains?�

Both of the immediate results of the Reuters story redounded exclusively to the benefit of MGM: the rise in its share price and the renewed interest of Time Warner. Someone close to MGM tried to tell me that the Reuters leak might have come from one of Sony’s supposed investment partners, but what investment banker would be dopey enough to leak a story that would drive up his target’s price and draw competing bidders out of the woods?

The circumstances of the press coverage, in fact, are such that an ambitious young investigator at the Securities and Exchange Commission might think about looking up the definition of “stock manipulation.�

The boost in MGM’s stock price arrived at a crucial moment for Kerkorian’s company, which was in the process of borrowing more than $2 billion to fund an $8-a-share dividend to stockholders. The dividend was announced Monday, less than two weeks after the Reuters story. (As the controlling holder of about 74% of MGM stock, Kerkorian will pocket about $1.4 billion of the dividend, tax-free; this is his way of executing what California homeowners would recognize as a “cash out� mortgage refinancing.)

MGM’s higher market capitalization dressed up its financial picture and possibly made the financing deal more digestible for the lenders. It also made Kerkorian’s $5-billion asking price for the studio look like less of a pipe dream.

Meanwhile, Kerkorian could profit from Time Warner’s renewed interest, and not only because a bidding war would increase his take. Sony, as a Japanese company, would probably have to buy MGM with cash, on which Kerkorian would have to pay taxes; Time Warner, as a buyer, would be more likely to pay with stock, making the transaction tax-free.

One interesting aspect of the speculation surrounding this deal is how it has tended to feed on itself. In the days since the initial report, very little concrete news has emerged to clarify the seriousness of Sony’s interest. Since Reuters launched the $5-billion number into the ether, it has remained there, fixed as an article of faith despite hints from other sources that no such offer has actually been made.

The price is a key issue, however, because when it comes to buying MGM, expressions of “interest� are cheap. Almost everyone in Hollywood admits that they would love to own the MGM film catalog, but that’s a lot different from saying that they’d be willing to meet Kerkorian’s lofty terms.

The current round of supposed bidding for MGM has the tired air of a sequel, like the studio’s recent “Barbershop� and “Legally Blonde� releases. Among the media companies MGM has reportedly been in “discussions� with over the years -- as seller, buyer or partner -- are General Electric Co.’s NBC, Vivendi Universal, Pixar Animation Studios, Walt Disney Co. Cablevision Systems Corp. and Comcast Corp. Mysteriously, none of those talks ever bore fruit.

Kerkorian has an incentive to burnish MGM’s image as a major player in Hollywood because the studio, in reality, has a future about as bright as George Costanza’s. In terms of ongoing production, there are two kinds of MGM movies -- James Bond features and everything else. With the exception of “Hannibal,� the $165-million box-office gross of which it had to split with Universal Studios, no MGM non-Bond movie has grossed more than $100 million in U.S. theaters since at least 1997, according to the tracking service Exhibitor Relations Co. (The figures don’t include foreign or video revenues.)

Although the measurements aren’t exactly equivalent, it’s worth noting that the nearly $500 million in market value MGM stock gained from the Reuters article is more than the combined box-office take of its last four big hits (that’s two James Bond movies and two “Legally Blondes�) -- all without having to subtract the losses from duds such as “Hart’s War.�

For its part, MGM’s current and upcoming slate is filled with features that might not elicit enthusiasm even from the practiced shills on “Entertainment Tonight.� Its heavily hyped action vehicle for the Rock, “Walking Tall,� opened weakly this month. Two potential blockbusters, the as-yet untitled Bond film No. 21 and a Steve Martin remake of “The Pink Panther,� won’t reach theaters until late 2005.

The one MGM asset that gets people talking is its library of thousands of past releases, many of them classics and proven crowd-pleasers. But estimates of the library’s value should take into account that the richest veins already have been mined; James Bond and Pink Panther DVD collections, for example, aren’t exactly novelties.

Whether the Sony deal breaks the pattern of recent history, only time will tell. But in dealing with MGM, the rule for potential bidders and for business reporters should be the same: Buyer beware.

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at [email protected] and read his previous columns at latimes.com/hiltzik.