© The Financial Times Ltd 2016
FT and 'Financial Times' are trademarks of The Financial Times Ltd.
The Financial Times and its journalism are subject to a self-regulation regime under the FT Editorial Code of Practice.
July 23, 2010 4:33 pm
To take the lift up to the 14th floor of the Metro-Goldwyn-Mayer tower in the heart of Los Angeles is to leave one world and enter another. The rest of the building is full of drab office furniture and, on most of the MGM floors, old movie posters in cheap frames. But floor 14, home to the MGM executive suite, is different. It was remodelled a few years ago to showcase the studio’s illustrious history in Hollywood and to impress visiting actors and directors. A sweeping staircase leads up from an atrium to a pristine screening room. The gleaming floors and walls are limestone imported from Italy. The effect is akin to being in a grand Roman villa rather than a bland Californian skyscraper.
But the most striking feature is in the walls. There, dozens and dozens of Oscar statuettes stand behind glass: Best Picture accolades for films such as The Apartment, Ben Hur and West Side Story. The statuettes for Grand Hotel, Gone with the Wind and the 1935 epic Mutiny on the Bounty are a reminder of MGM’s golden age when, from the mid-1920s and for most of the next three decades, the studio ruled the Hollywood roost, churning out adventure stories, capers and classic musicals, and launching the careers of Greta Garbo, Clark Gable and Joan Crawford. “MGM had the biggest stars, the best choreographers, the best composers, the best directors,” says Robert Osborn, a film historian and the official biographer of the Oscars. “It was the studio all the others strived to be.”
Unfortunately for MGM, the opposite is true today. The home of the James Bond series and the owner of classics such as The Good, the Bad and the Ugly, 12 Angry Men and The Silence of the Lambs, is on the edge of insolvency and flirting with bankruptcy. It has a $3.7bn debt pile and is unable to make its regular interest payments: the revenues from its vast, 4,000-title film library, the biggest in Hollywood, have almost halved in the past 12 months, falling to about $250m in its most recent fiscal year from close to $500m the year before – and short of the $300m needed every year to service its debt. The library is MGM’s biggest asset and its health depends on people buying MGM’s DVDs. But they’re not buying: DVD sales, once Hollywood’s biggest cash generator, have been in steep decline across the entertainment industry for the past three years, falling by as much as 25 per cent as consumers run out of space on their shelves or spend their money on other forms of entertainment.
The studio’s troubles don’t end there. Its most prized property – James Bond – has been left to stagnate, a casualty of the uncertainty about MGM’s future. Sam Mendes signed on to direct the next film in the series, which reignited spectacularly with Daniel Craig as the new Bond in Casino Royale and Quantum of Solace – films that generated a combined $1.2bn at the box office. But the series is in limbo, postponed indefinitely by the Broccoli family of producers, which shares the rights with MGM, because of the uncertainty surrounding the studio.
The same is true of plans to produce a live-action version of J.R.R. Tolkein’s The Hobbit. After the blockbuster success of The Lord of the Rings trilogy, it looked liked a box-office no-brainer; and Guillermo del Toro, who won rave reviews when he directed Pan’s Labyrinth, spent two years preparing to make the film. But he recently left the project. “There cannot be any start dates until the MGM situation gets resolved,” he said. A die-hard fan of the Tolkein books, Del Toro described his departure as “the hardest decision of my life”.
MGM is in Hollywood purgatory, lacking the funds to produce new films and too loaded with debt for prospective buyers. Last summer, its shareholders called in Stephen Cooper, a restructuring expert with experience rescuing ailing companies – he oversaw the bankruptcy of Enron, for example. Since then, he and his team have strived to find a way forward for MGM – anything that could help it recapture a sliver of its former glory.
So far their efforts have come to nothing. Several bids were made for MGM but the debtholders dismissed the offers as too low. Yet the longer it takes to stabilise MGM, the harder it will be to arrest the sliding performance of its film library and breathe life into its intellectual property, such as the Bond franchise. “They have to do something soon,” sighs one former MGM executive. “Time is running out.”
. . .
The story of MGM’s rise and fall features a starry cast of Wall Street dealmakers and A-list acting talent. The biggest star of them all was the studio’s co-founder, Louis B. Mayer, a cigar-chomping mogul who turned critical and commercial hits into an immense personal fortune. Aided by Irving Thalberg, his brilliant young head of production and the inspiration for F. Scott Fitzgerald’s The Last Tycoon, MGM under Mayer’s leadership churned out a stream of crowd-pleasers in the 1920s and 1930s. Thalberg supplied the creative inspiration. “He was a genius – a king,” says Robert Evans, the former chairman of Paramount Pictures and the producer of The Godfather and Rosemary’s Baby (as an actor earlier in his career, Evans played Thalberg in the 1957 film Man of a Thousand Faces).
Mayer, meanwhile, had a manipulative streak and was often described as the best performer at MGM, capable of bending the will of recalcitrant actors. He was feared by his employees – so much so that, upon hearing that Mayer’s funeral had been well-attended, the comedian Red Skelton allegedly said: “It just goes to show you that if you give people what they want, they’ll show up for it.”
Mayer declared that he wanted to make “beautiful pictures about beautiful people”, tonic to the glamour-starved audiences of Depression-era America. The strategy shifted following his death, and in the 1950s and 1960s, the studio moved into earthier fare. But the Oscars kept rolling in: Dr Zhivago, Midnight Cowboy, In the Heat of the Night and Annie Hall all showed that MGM was capable of adapting its output to changing times.
From the 1960s onwards, the studio changed hands on multiple occasions: Kirk Kerkorian, the son of an Armenian immigrant farmer, used it to amass a fortune, buying and selling it three times in 30 years. Ted Turner, the founder of CNN, owned it for all of 74 days in 1986 before selling it back to Kerkorian (although he kept most of the rights to the studio’s early films). Giancarlo Parretti, the disgraced Italian financier, also owned MGM for a short time, parading one of the studio’s trademark lions through his office when he completed his takeover in 1990. But his reign came to a swift end and he later faced fraud charges.
MGM’s fortunes have over the years been linked with those of the Broccoli family. Barbara Broccoli and her half-brother Michael G. Wilson initially expected to be applying the finishing touches to the 23rd film in the Bond series this year, until MGM’s financial troubles put paid to that plan. With her movie-star looks, Broccoli is not out of place mingling on the red carpet, yet away from premieres she and Wilson guard their privacy jealously and are fastidious in the extreme when it comes to protecting Bond. “They are not the easiest producers to deal with,” says one executive who has worked extensively with them. “They believe they are the only ones who know the franchise and that everyone else should step aside.”
Still, there is no doubt that the Broccolis have managed Bond well, extending the life of one of MGM’s biggest assets by casting Craig as 007. The ongoing success of the series has also made them fabulously rich: Broccoli once bought her then-boyfriend a new Aston Martin on a whim and gave him a Picasso for his birthday.
The Bond series is one of the most profitable collections in MGM’s film catalogue which, despite the sale of older titles to Turner, remains the biggest library in Hollywood: films such as Roadhouse, When Harry Met Sally and Dirty Rotten Scoundrels are all big sellers. By the start of the 21st century, the library had become a cash machine, cornerstone of the company – and a prize coveted by rivals. Unfortunately for MGM, it was a prize that would become the foundation of the company’s current woes: the cash it was generating convinced the consortium of companies buying the studio for $5bn to load it up with debt which, ultimately, it could not afford to repay.
. . .
In 2004, Kirk Kerkorian, who was then MGM’s largest shareholder, decided to put the studio on the auction block after exploring bids for rival studios that never materialised. Enigmatic and reclusive, the 93-year-old never speaks to the press; but in a long career, he has become one of America’s richest men. “I met Darryl Zanuck [the legendary former head of 20th Century Fox] and Jack Warner [a founder of Warner Brothers] a couple of times and Kirk was like them,” says Peter Guber, the former Sony Pictures chairman who won an Oscar for MGM with Rain Man. “Zanuck and Warner understood films, but Kirk understands money. There is no better entrepreneur.”
Like Warner and Zanuck, Kerkorian had humble beginnings. Born in Fresno, California – a long way from the bright lights of Hollywood – he boxed as a young man and learnt to fly transport planes in the British Royal Air Force. In the 1960s, he sensed potential in Las Vegas and began buying casinos, eventually becoming the biggest operator in the city. He has had for most of his adult life an uncanny ability to pick the right time to buy and sell, although he lost millions recently when he sold a large stake in Ford for a hefty loss. Still, his timing with MGM was perfect, and when he sold the studio in 2004, at the top of the market, his controlling stake was valued at more than $3.5bn.
Kerkorian had Alex Yemenidjian, the Hollywood outsider he brought in to run the studio, to thank for the high bids. With razor-sharp cheekbones and clothes that he designed himself – he was particularly proud of his shirts, with custom-made rounded collars – Yemenidjian cut a dash around Hollywood. And the Argentina-born Armenian also proved to be particularly adept at squeezing money out of MGM’s library, doubling its cash flow in four years. This meant there was no shortage of buyers when Kerkorian decided to sell. After all, there was plenty of cheap credit around.
A consortium made up of Sony, the US cable group Comcast and a group of private equity firms – the two biggest being Providence Equity Partners and TPG – soon found itself in a contest with Time Warner. For Sony, MGM had a clear appeal: Sir Howard Stringer, Sony’s chief executive, realised that the MGM library could help the Japanese group get its Blu-ray technology into more homes.
Blu-ray was at the time locked in a battle with a rival format – Toshiba’s HD-DVD – in a race to succeed the DVD. It made sense for Sony to have influence over the biggest film library in Hollywood: the more titles available on Blu-ray, the more incentive there would be for consumers to switch to the format. Toshiba wanted MGM for the same reason, and it joined Time Warner’s bid at a late stage but failed to prevent the Sony/private equity consortium sealing the purchase in a $5bn deal.
As part of the purchase, Sony paid a $250m advance for the right to co-produce and distribute Casino Royale and Quantum of Solace as well as distribution rights for a handful of smaller films, including 21 and a remake of the Pink Panther. It also secured a contract to manage all of MGM’s TV and film distribution, as well as the 4,000 films in the library. Comcast struck a similar deal with MGM, paying $250m for the right to use the library films on its video-on-demand service.
Sony’s involvement in the deal entitled it to lucrative distribution fees. Providence and TPG took on most of the financial risk: they each invested between $225m and $300m and also arranged debt of $4bn to pay for the purchase – debt that was loaded on to the studio once the deal was signed. Providence led the deal and, together with TPG, had control of the board – and effective control over the company.
On paper, the purchase looked like a good move. Sony would take over the library and sell MGM’s films to retailers such as Wal-Mart and Best Buy and broadcasters around the world, saving millions of dollars in staff costs and overheads. MGM was at the time producing a few new movies each year to help keep the library fresh: the consortium quickly scaled that back, using new Sony movies to sell the library instead. New titles that retailers want to buy are an essential bargaining chip when selling older films, says one rival studio executive. “If a retailer wants my hot new movie, then they have to buy 10 older titles to get it,” he explains. Without new titles, a film library can become “a melting ice cube”, says a former MGM executive.
The new owners took a pair of scissors to MGM and hundreds of employees were laid off. But within a matter of months, cracks appeared in the consortium when profits from the library started to fall. Sony’s partners were quick to blame the Japanese group: before completing the deal, they had raised doubts that Sony would sell MGM’s titles as well or as aggressively as it sold its own films. “There were risks they would favour their films over MGM,” says one person who was closely involved. “But they gave us assurances that wouldn’t happen. Then they didn’t do what they promised and it became clear that what we had feared was actually happening – MGM sales were going down but Sony’s weren’t.”
Sony declines to comment but people close to the company privately acknowledge that it could have done better. “It’s fair to say that we underperformed,” says one. Sony had enjoyed several years of hits before the deal took place: its Spider-Man 2 had been released the year before MGM was sold and became one of the decade’s biggest DVD hits. But in the year after the MGM deal, Sony released a series of flops, such as Stealth and Bewitched. “We didn’t have great movies and that was a factor in how we sold the library,” concedes one person close to the company. Another person familiar with MGM says the plan was flawed from the beginning. “When someone else is distributing your films, you are the caboose. Their films are at the front of the store and on the top shelf, yours are at the back and at the bottom.”
Sony eventually shook up its management of MGM’s DVD distribution business, when it recognised that it had to do better. But it was too late: MGM’s expensive ice cube had started to melt.
. . .
Despite the poor performance of MGM, Sony and Comcast’s investments in the studio would ultimately pay off. “I think Sony and Comcast did OK out of the deal,” says Jessica Reif Cohen, media and entertainment analyst with BofA Merrill Lynch. “They both got benefits – Sony was able to build support for Blu-ray [which eventually defeated HD-DVD] and it earned big distribution fees from the Bond films, while Comcast was able to use MGM films to build its video-on-demand business.” A banker familiar with the deal agrees. “It tilted the battle between Blu-ray and HD-DVD in Blu-ray’s favour,” he says. “Sony not only got its money back … it made a pretty healthy profit.”
But while Sony was making money from the two new Bond films, its private equity partners were having a terrible time. Fed up with Sony’s poor performance selling the library, Providence and TPG booted the company out, bringing in the Fox studio to sell the older titles instead. Without Sony, MGM found itself lacking access to new movies – the key to selling the library. So MGM’s new owners reversed a decision that had been made only months before: the studio would get back into producing new films. The move raised eyebrows around Hollywood. “Flogging DVDs in Bentonville [where Wal-Mart is headquartered] is not particularly sexy, but it’s what MGM was good at,” says one person who was close to the situation at the time. “Making movies and buying scripts? That’s a lot more interesting. The private equity guys bought into all of that stuff.”
Harry Sloan, a media entrepreneur who once made $200m when a Scandinavian broadcasting business that he founded was taken public, was brought in as chairman of the studio. Sloan set about the substance of his work with enthusiasm, but he was also noted for his quirky habits. He arranged his office in the MGM building according to feng-shui principles and kept a selection of crystals in the screening room to improve energy flows – he even had his office telephone number changed, replacing all the fours with eights, a lucky number in China.
Sloan had a point to prove in Hollywood, having tried and failed to turn New World Entertainment into a studio powerhouse in the 1980s. He started off promisingly, raising a $500m film fund for MGM’s United Artists label. He even persuaded Tom Cruise, fresh from his career-threatening sofa-jumping interview with Oprah Winfrey, to come into UA as a shareholder and run it alongside Paula Wagner, Cruise’s production partner.
But the Cruise experiment failed miserably: the two UA films featuring the star – Lions for Lambs and Valkyrie – failed to set the box office alight and did little to pull MGM out of the mire. Wagner left UA after only a short time and Cruise has not been seen at MGM for months.
Sloan desperately needed money for film production and tried to raise a new fund to pay for MGM’s big-franchise movies, such as new James Bond films and The Hobbit. Goldman Sachs was hired to raise the money, but at the 11th hour, the banks got spooked: it was the summer of 2007 and the credit crunch was beginning to take hold. MGM began working with another bank but it was too late. Within a year, the global financial meltdown would be in full swing and banks that had once been happy to lend to the film industry had bigger things to worry about.
Sloan tried a different tack, hiring Mary Parent, a glamorous and highly regarded production executive fresh from overseeing a run of box-office money-spinners, including Gladiator, The 40-Year-Old Virgin and Bruce Almighty. She was tasked with turning MGM into a production force.
In the previous two decades, MGM’s reputation among writers and directors had slumped: it became known as the last stop for agents desperate to sell a project. Parent changed that, buying a string of hot scripts and doing deals with big stars. She acquired the rights to Robert Ludlum’s The Matarese Circle and struck a deal with Denzel Washington to star; she also signed Darren Aronofsky, director of The Wrestler and a bright young talent, to direct a remake of RoboCop. The trouble was that while MGM had money from its library to pay for scripts and development deals, it didn’t have enough money to produce big-budget films. Parent’s hands were tied. Nor had the deals come cheap. “They were spending money like they were Universal,” complains one executive whose company is involved with MGM. “But Universal is owned by GE and isn’t loaded with debt.”
MGM was sitting on a pile of valuable intellectual property in its film library, so Parent, who is still with MGM, also began planning remakes of Red Dawn and Poltergeist. She and Sloan were hopeful that money to produce the films could eventually be raised, but the financial crisis and the recession scuppered that. With no production funds and all of MGM’s available cash being used to service debt, nothing else could be done. MGM had big ambitions but no money to make movies.
. . .
One of the more memorable scenes in Casino Royale takes place around a high-stakes poker table in Montenegro, where Daniel Craig as James Bond has to figure out if the film’s villain is bluffing. A different game of bluff is currently taking place among MGM’s many lenders, who took control of the company last year when it was unable to make its debt repayments. Sloan stepped aside as chief executive but remained on the board, replaced by Stephen Cooper, a restructuring expert who dealt with the lenders. Since then, the lenders have had a choice: throw in their cards – accepting that no one is going to make a bumper offer for the company and cutting their losses – or hold on to MGM in the hope that they may yet be able to produce a winning hand. They have opted for the latter, but not before trying to sell the company last year. One person involved says the lenders made a big mistake when they let it be known MGM was in trouble and for sale – mainly because it set alarm bells ringing around Hollywood. “Normally, putting a company up for sale wouldn’t have scared anyone,” the person said. “But in Hollywood it freaked people out.” A former MGM executive agrees. “The movie business runs on relationships and confidence. That has all dried up at MGM.”
The uncertainty has fed Hollywood’s rampant rumour mill, with the fate of MGM a constant topic of conversation in the Beverly Hills wine bars and lunch spots frequented by film executives and talent agents. Much of the gossip concerns the fate of the stars and directors who have signed deals to work on now-stalled MGM projects, with some drifting away to work on other movies. David Cronenberg was lined up to direct The Matarese Circle, for example, but took a job on another film when the studio got into trouble, as did Aronofsky, when he left the RoboCop remake.
Potential partners that could have salvaged some of its films in development, such as the Red Dawn remake and The Matarese Circle, have given MGM a wide berth because they fear the studio could go bankrupt. “The lenders were very naive … they just didn’t understand what would happen when they put it up for sale,” says the person familiar with the situation.
More than 100 companies own MGM’s debt, which has been traded many times since the 2004 deal took place. “There are too many cooks in the kitchen,” says another person close to the situation, referring to efforts to restructure the studio. “It’s impossible to get agreement on anything.” A restructuring might have been easier were it not for the intervention of two hedge funds, Anchorage and Highland Capital, which bought large chunks of MGM’s debt last year. “They bought at a price which values MGM at something like $2.4bn,” says a person involved. The highest bid for MGM in last year’s auction was from Time Warner; it offered $1.5bn, rather less than the $5bn or so it was prepared to pay in 2005. Led by Anchorage and Highland, the lenders are now preparing to sit out the current economic slump and see if the company can be sold at a later date for a higher price.
But to increase its value, the company needs to wipe out its debts and a source of new movies must be found to breathe life into the library. Three companies have lodged separate proposals to combine their operations with MGM: Summit Entertainment, which was behind the blockbuster Twilight series; Lions Gate Entertainment, which makes the critically acclaimed Mad Men TV show and the Saw horror films; and Spyglass, one of the production companies involved in the upcoming Dinner for Schmucks, starring Steve Carell and Paul Rudd. The irony is that the three plans being considered closely resemble the strategy put together by the Sony consortium back in 2004, which was to use new movies made by someone else to drive sales of MGM’s older titles.
While the lenders decide what to do, one thing is clear: MGM, like many other businesses bought by private equity firms in the heady middle days of this decade, was hamstrung by its debt burden. One of its big problems is its independence and the fact that it is not part of a bigger media conglomerate: Paramount is part of Viacom, for example, which owns TV stations such as MTV, while Warner Bros is part of the Time Warner empire, which also includes CNN. “There’s nothing that MGM is going through that other studios have not also gone through with DVD sales falling and the library under pressure,” says one person with an intimate knowledge of the company. “But all the other studios are part of larger conglomerates and don’t have that much debt sitting on them.”
Yet with James Bond, one of Hollywood’s most valuable properties, in its hands, and a library that could presumably rise in value – provided consumers start buying films again, possibly via a yet-to-be-invented digital device – it is not necessarily the end of the road for the studio that dominated Hollywood’s golden age. “If MGM had scored a big box-office hit in the last few years, and if the economy had not crashed, things might be different,” laments one former executive. But “if” is a big word in Hollywood.
Matthew Garrahan is the FT’s LA correspondent. His last piece for the magazine was a road-trip with Oliver Stone to interview Venezuelan president Hugo Chávez. Read it and see the video at www.ft.com/chavez
Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.