Friday 8 August 1997
By eBroadcast Staff and agencies.

MGM Sets Merrill, Morgan For IPO

NEW YORK (Variety) - Metro-Goldwyn-Mayer Inc. said Tuesday it was moving ahead with an initial public stock offering, but disagreement on Wall Street about the timing of the sale meant the studio couldn't hire the bank it wanted to lead it.

MGM advised Wall Street giant Merrill Lynch on Monday that it would be the lead manager of the offering, alongside the studio's financial adviser, J.P. Morgan. Since Morgan isn't known for its strength in underwriting stock offerings, Merrill's role is the key one.

Sources say MGM's top choice for the slot was Goldman Sachs, but Goldman advised the studio to wait a year or two. At least one other major bank also advised the studio to wait, to build up a track record of successful film releases before trying to go public.

In the end, MGM hired Merrill because the firm ranks alongside Goldman as a top bank in arranging public offerings, and the studio wanted one or the other. At least two other investment banks are expected to be hired as co-managers, likely to be picked from a group of four: Furman Selz, Cowen & Co., UBS Securities and Deutsche Morgan Grenfell.

Goldman executives did not return calls and an MGM spokesman declined to comment, but people close to MGM confirmed this account. For legal reasons, the identity of the underwriters was not disclosed by MGM Tuesday when it announced the offering plans in a brief statement.

MGM gave no details about the offering, other than saying that no shares would be sold by the two shareholders, billionaire investor Kirk Kerkorian and Australia's Seven Network. Further details will come when MGM files its prospectus with the SEC in several weeks.

Goldman's advice to MGM is believed to be partly based on the firm's belief that the stock market is too high, although it likely also reflects a widespread view about the poor performance of most film stocks. In recent years, every independent film stock except one -- New Line Cinema -- has ended badly, such as Carolco Pictures' bankruptcy filing, Savoy Pictures' low-priced sale to HSN Inc. or Cinergi Pictures Entertainment's current liquidation.

In MGM's case, the studio will be going public before it has released its first major picture since its acquisition by Kerkorian and Seven. The offering is likely to be priced shortly before the new James Bond picture is released in December, to ensure the stock is sold on the hype about the picture.

MGM executives are clearly aware of the dangers in going public early. But MGM chairman Frank Mancuso has been keen to go public as soon as possible, to help the studio do acquisitions using stock, to enhance management compensation packages and also, some Wall Streeters say, to dilute the influence of Kerkorian and Seven chairman Kerry Stokes.

While $200 million to $300 million will likely be raised in the offering, cash is not the objective. Bankers told the studio it could raise a lot more, but that would mean diluting Kerkorian and Seven more than the two wanted.

The studio is likely to be valued in the offering at only around $2 billion, barely more than what Kerkorian and Seven paid for MGM and the recently acquired Orion Pictures. Bankers say, however, that with no track record to speak of, MGM can't try to get a big price in the offering.

MGM chief financial officer Michael Corrigan told bankers in meetings over the past few weeks that he knew an early offering would mean the company wouldn't get the price it is potentially worth. As a result, he said, the studio wanted to sell the minimum amount of stock it needed to ensure enough trading liquidity after the offering.

This route is one suggested by several bankers. The hope is that if MGM performs well at the box office, it could raise more money at a higher price later on.

SPELLING LIFT

NEW YORK (Variety) - A strong performance from television operations helped lift Spelling Entertainment Group Inc. back into the black in the second quarter. Spelling reported net income of $3 million or 3 cents a share. This compares with a year-ago net loss of $22 million (or 24 cents per share), which was largely attributable to a $20.2 million loss from discontinued operations at Virgin Interactive Entertainment.

GRANADA GRABS TV EXEX FOR KEY POSTS

LONDON (Variety) - Granada TV has poached two senior drama execs from rival ITV producer United Film & TV Prods., a move that coop production company in the ITV network. Simon Lewis and Sue Hogg have been appointed controller and deputy controller of drama at Granada TV. They are currently controller of drama and executive producer, respectively, at UFTP, the production arm of the third-ranking ITV group.

Blockbuster Bruises Viacom Q2 Results

NEW YORK (Variety) - A hefty $323 million writeoff at Blockbuster pushed parent company Viacom Inc. into a $210 million loss for the second quarter, compared with a $26 million profit a year earlier.

Viacom had warned of the write-off last month, which covered the costs of closing certain international stores and losses on excess retail stock. At the same time Viacom had revealed that the video chain's second-quarter earnings would collapse.

And the conglomerate kept its word Tuesday, reporting that Blockbuster's operating profit plunged 68% to $45.9 million as a result of lower profit margins on video sell-through business, costs of its new distribution system and rental tape writeoff costs.

Aside from the besieged video chain, Viacom's results were mixed. MTV Networks (including MTV, Nickelodeon, Showtime and Viacom's TV stations) once again led the way with earnings growth, posting 19% higher cash flow (earnings before interest, taxes, amortization and depreciation) of $200.1 million on 11% higher revenue of $625.5 million. The growth was largely due to very strong advertising sales at MTV, although the Showtime Network helped out with a 63% increase in cash flow.

But the entertainment division, primarily Paramount Pictures, suffered a 17% decline in cash flow of $94.9 million on 14% higher revenue of $862 million. Viacom blamed the decline on a change in Paramount's television product mixas well as the difficulty of competing with the performance of Paramount's Mission: Impossible last year.

Simon & Schuster managed to squeeze 6% higher cash flow of $55.9 million in what has been a tough publishing environment.

Viacom's total cash flow fell 73% to $127 million on 8% higher revenue of $3.03 billion. Excluding the impact of the writeoff, cash flow fell 21% to $374 million.

The earnings result was largely in line with Wall Street expectations, analysts said, and Viacom stock closed up 19 cents to $30.50.

"The numbers were on target," said Merrill Lynch analyst Jessica Reif.

How quickly Viacom can turn around Blockbuster remains the biggest issue for the entertainment conglomerate and was the subject of much of a conference call held by Viacom chairman Sumner Redstone with Wall Street analysts Tuesday, according to those on the call.

Redstone revealed on the call that a Blockbuster stock offering, which was planned for early next year, is on hold at least until the video chain starts showing earnings growth.

In a statement, Redstone said the new management team at Blockbuster led by new CEO John Antioco is "putting operational and marketing initiatives in place that are designed to refocus on the video rental business and grow market share. Accordingly, we are optimistic that Blockbuster will enter a period of renewed growth next year."

But analysts said Redstone and other Viacom executives were notably more cautious in their predictions on the call. Redstone said that while Blockbuster's revenue decline has flattened out in recent weeks, he was sticking with projections that the full year will show a 4% drop in revenue adjusted for store openings. This assumption underlay Viacom's prediction last month that full-year cash flow would be $400 million to $500 million.

Redstone revealed on the call that Blockbuster's store-building program is slowing down. After opening 500 stores in the first half of the year, another 100 to 150 stores will open by the end of September and no stores will be opened in the fourth quarter.

The program of new store openings is under review, Redstone said, and decisions about how many stores will be opened next year have not been made.

"They have really identified some of the problems and the rest of the business is reasonably solid and secure. But (Blockbuster) is draining their time and attention and I think it's a major distraction," said Cowen & Co. analyst Harold Vogel.

Vogel added that whatever Viacom does to fix Blockbuster's short-term problems, "it doesn't address the long-term issue, which is a change in technology and shift in consumer preferences (away from video)."

Merger Approach

TeleWest Communications PLC, the United Kingdom's second-largest cable-television company, confirmed reports that it has been approached by New York-based NTL Inc. about a merger. TeleWest, owned by U.S.-based cable giant Tele-Communications Inc. and Baby Bell telephone concern U.S. West Inc., owns and operates a cable network in various regions of England and Scotland. The talks would create one of the U.K.'s largest cable-TV and phone companies.