Amazon Spent Years Building a Studio... So Why Does It Want to Buy MGM?By Berna Barshay  Reports have surfaced over the last couple of weeks that e-commerce giant Amazon (AMZN) is in talks to buy Hollywood studio MGM...
MGM (aka Metro-Goldwyn-Mayer) is a name that evokes the golden age of Hollywood and dates back to 1924. The studio – which produced diverse hits across multiple generations ranging from Gone with the Wind to Ben-Hur to Rain Man – spent much of the last 50 years being tossed around between billionaires. MGM first came under the control of billionaire Kirk Kerkorian in 1969. The deal maker was also a big player in the build-out of Las Vegas, which explains how the studio ended up lending its initials to the company that would become the largest hotel and casino operator in that city. Kerkorian sold MGM in the 1980s to CNN founder and billionaire Ted Turner, only to buy it back a few years later. Kerkorian later sold it and repurchased it yet again in 1996. Finally in 2004, he exited the studio for good, and by 2010, MGM ended up filing for Chapter 11 bankruptcy. The company ultimately emerged from bankruptcy, and its former creditors ended up owning the company. And now – yet again – it finds itself up on the block for sale. Whoever buys MGM will inherit a film library almost 100 years in the making, with 4,000 films including the Rocky and Legally Blonde franchises as well as the company's crown jewel: the James Bond franchise. Source: www.007museum.com MGM also has a TV-production arm, which produces or co-produces both scripted programs – such as The Handmaid's Tale for streamer Hulu and Fargo for the FX Network – as well as reality programming, such as Survivor for CBS and The Voice for NBC. The TV library consists of 17,000 hours of programming. The price tag for the deal, according to tech site The Information, is reportedly between $7 billion and $10 billion. Bloomberg reported yesterday, "MGM has told its employees that it has a firm offer from Amazon at $9 billion, but also that the deal could fall apart soon if they don't agree on a price." Amazon has not commented on the matter yet. With more than $70 billion in cash on its balance sheet and a $1.6 trillion market cap, buying MGM would be a drop in the bucket for Amazon... But after years of investing in its own studio, why would it want to buy MGM? Amazon has already pumped a ton of money into building its film and television capabilities. In 2020, the amount spent on movies, shows, and music added up to $11 billion, up from $8 billion in 2019. To get a sense of the magnitude of Amazon Studio's investing, consider that Amazon is spending almost $500 million developing just one show... The Hollywood Reporter last month shared that the Internet giant was going to shell out $465 million for a single season of its new TV show based on The Lord of the Rings. This is almost 5 times more than HBO spent on the super-expensive Game of Thrones, which cost roughly $100 million per season. Amazon Prime Video is the No. 2 streamer after Netflix (NFLX) when measured by the number of subscribers. Amazon recently disclosed that it has more than 200 million paid subscribers... which puts it within striking distance of market leader Netflix. Of course, I'd take that with a huge grain of salt, since, as I have said before, Amazon Prime Video is more like a "gift with purchase" that comes with a Prime subscription than a standalone sale. It feels like the pitch is, "Come for the two-day shipping, stay for the free entertainment." Certainly, purchasing a 4,000-film library – and one with such a range of hits – would boost the value proposition of the Prime Video product at a time when competition is heating up in the streaming wars. Discovery's (DISCA) deal to merge with AT&T's (T) entertainment assets – those that it picked up when it acquired Time Warner – is just another sign that size and breadth are increasingly regarded to be a prerequisite to success when it comes to building a streaming service.
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While Amazon can well afford dropping $10 billion on MGM, the deal would be the second-largest it has ever done... At the top end of the range, MGM would check in just behind Amazon's deal for grocer Whole Foods back in 2017, which cost almost $14 billion. An Amazon deal for MGM would come a few years after – and at a premium to – a serious flirtation that Apple (AAPL) had with the studio. Rumors at the time were that Apple considered buying MGM for $6 billion. While MGM's owners ultimately decided to not to sell to Apple, a lot has changed since then. The pandemic and resulting closure of movie theaters placed enormous pressure on film studios. And unlike other legacy media companies that were able to clip coupons from cable networks or other holdings less directly impacted by the pandemic, MGM found itself less hedged for this turn of events. But as Bloomberg reported... Unable to release its movies in theaters, MGM sold some of the lesser titles to streaming services and discussed selling the latest James Bond movie, "No Time to Die," to Apple and Netflix. While the would-be buyers balked at the price tag, MGM used those talks to explore a sale of the whole company. It officially put up a for-sale sign by hiring a bank to assess its options. With the landscape for movie going in theaters perhaps permanently changed by the pandemic, we've seen WarnerMedia (at least under its current AT&T ownership) go full force into releasing big movies to streaming the same day they hit theaters. Disney has also been experimenting on this front. If the future of movies is on the small screen, then being able to make compelling, high-quality feature films becomes a lot more important for streaming services. While Amazon has had success developing both popular and critically acclaimed TV series such as The Marvelous Ms. Maisel, Jack Ryan, and Bosch, Bloomberg explains that it's been rougher going on the film front... Amazon has had little success making movies in house. Its biggest successes have been movies it acquired at Sundance, such as "Manchester by the Sea" and "The Report." Its two biggest movies of the pandemic, "Borat" and "Coming 2 America," were also acquisitions. "Coming 2 America," the sequel to the popular Eddie Murphy comedy, is one of the most popular new movies in Amazon history. Amazon wants to release big movies and create franchises that can appeal to viewers all over the world. It doesn't have any in-house nor executives with the track record. MGM offers Bond, one of the most popular film franchises around, as well as a deep roster of film executives, led by Mike De Luca. In addition to the well-explored franchises like Bond and Rocky, somewhere in that 4,000-film archive, there are surely more titles that could be fodder for a remake, reboot, or reimagination. Of course, the most valuable piece of content in the MGM portfolio could also prove a stumbling block to the deal. As Bloomberg explains... Pretty much no one thinks MGM is worth the $9 billion it wants, and it doesn't own its most valuable asset. Though MGM releases the Bond movies, it doesn't control them. The Broccoli family wields veto power over all things Bond. You can't cast a new Bond or create a spinoff TV series without their approval. And thus far, they've been reluctant to do much of anything but release a movie every few years in as many theaters as possible. Entertainment industry authority Variety echoes Bloomberg's skepticism over the deal price, noting... Industry executives are stunned that Amazon is in negotiations to buy Metro-Goldwyn-Mayer in a deal that could reach $9 billion. Their shock comes from a belief that the price tag severely overvalues the studio behind James Bond, the Pink Panther and "Legally Blonde." And Variety adds... Industry insiders say that the true value of the studio is more in the $5 billion to $6 billion range along with the assumption of some debt. Even then, they are skeptical that MGM's prize asset, its stake in the 007 franchise, can be properly monetized. The assumption is that the Broccoli family would veto the direct release to streaming of any James Bond feature film and may also nix any TV show that proposes to incorporate the James Bond character. There's also concern over the casting of the next Bond (actor Daniel Craig is leaving the role) and the possibility that, per Variety, the "hard-living womanizer character may not have as much resonance with younger generations." I find it hard to believe the difference between $6 billion and $10 billion would matter that much to Amazon if it really sees MGM as strategic. If it wants this asset, it'll have it and likely won't (and shouldn't) fret too much about overpaying by a few billion. MGM is truly a scarce asset. The number of film libraries like MGM's are limited, and the rest of them are unlikely to come up for sale. The only other comparable property I can think of that could possibly be shaken loose is "mini-major" studio Lionsgate (LGF/A). Amazon is so big that this deal would really be a rounding error financially... With approximately 500 million shares outstanding, Amazon is worth $2 billion more if the stock goes up $4, which represents just a 0.1% move at the current quote. Overpaying by a couple of billion is literally a rounding error in the bigger picture. I've never 100% understood the synergies between the Amazon Studio and the rest of Amazon's businesses. Sure, I enjoy having the streaming service available when there is a show that I want to watch, especially since I think of it as a free bonus that comes with my Prime membership, which I keep exclusively for the two-day shipping. I always imagined there are a lot of people like me out there – happy to take the streaming service, but wouldn't pay for it as a standalone. I'm not sure what revenue synergies Amazon thinks it is extracting by offering Prime Video... but it wouldn't be the first time that a well-thought-out Amazon endgame is opaque to a third-party observer. For whatever reason, Amazon has dubbed success in streaming video as important to its broader goals. If it wants to maintain and build on its position in streaming, buying MGM seems to be a no brainer, regardless of questions about the price tag. In the mailbag, a reader asks for clarity on Empire Research recommendations, and another asks a timely question... Does anyone out there subscribe to Amazon Prime mainly for Prime Video? Would you consider canceling your Prime subscription if Amazon walked away from its streaming video service (something that is almost guaranteed not to be in the cards)? Who has been your favorite actor playing James Bond? Let me know at feedback@empirefinancialresearch.com. "Empiirians: "I signed up for an Empire Research newsletter in April of 2021 and one of the recommendations was to buy was Virgin. It has since dropped almost 20%. But this week I learned that Whitney told subscribers to sell it before April and they booked a big gain from when he first recommended it! What gives? I feel like I got snookered. "Also, in the Empire columns and site there are ad/links to other newsletters, including a big push by Steve Sjuggerud to sign up with him to learn about the coming crash. "Does Whitney endorse Sjuggerud's forecast? He and Empire allow it to be in the Empire publications. I am confused as to whose advice I have signed up for. I think these other voices allowed into the Empire site create a conflict of interest and of direction. Please explain." – Bruce C. Berna comment: Hi Bruce, what Whitney was referring to regarding Virgin Galactic (SPCE) was a recommendation to Empire Investment Report newsletter subscribers to exit the stock in January 2021. The stock was initially recommended to subscribers in December 2019, so it was a huge return from then. The recommendation you're referring to appears to be from Enrique Abeyta's short-term-focused Empire Elite Trader service (and it's actually up after today's huge move higher). So Whitney's statement was accurate... but simply referring to a different time and publication where SPCE shares were recommended. As for the guest essays by Steve Sjuggerud and our mentions of his special events, from time to time we send our readers marketing materials for our sister companies. All of us at Empire Financial Research and our sister companies are independent... each of us has his or her own thoughts on the market. We know Steve takes good care of his readers, so when he's excited about an idea, we let our folks know about it. "Berna – What do you think of the rumor that Amazon is in talks to acquire MGM? A reason to invest in one or the other?" – Ken W. Berna comment: Ken, your question inspired today's essay, so I hope you're reading! As for investing in either company... MGM is private, so there is no way to invest in that one. Regarding Amazon, I think it is an appropriate core holding for most portfolios, given its size, how much of the market it represents, its dominance of its industries, the incredible talent throughout the organization and especially in its leadership, and the great promise of its AWS (Amazon Web Services) division especially. Regards, Berna Barshay
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