MGM Holdings, Inc

Embed Size (px)

Citation preview

  • 7/27/2019 MGM Holdings, Inc.

    1/5

    IB Equity ResearchOctober 14th, 2013

    MGM HOLDINGS, INC.

    Thesis Overview

    We are recommending a BUY on MGM studios (MGMb) because it offers 72% upside and

    16% downside, with the prospect of an IPO or a take-out. This post-reorg equity trades OTC

    and is inexpensive in both relative and absolute terms. MGMb (Metro Goldwin Mayer) is a so-

    called mini-major movie studio that produces a handful of films each year and maintains no

    physical production facilities. The company also makes TV projects, owns the MGM cable

    network, and a 19% interest in the EPIX cable network.

    Stock Rating BU

    Catalyst Category Val

    Price Target $95.

    Price (10/14/13): $58.50

    Upside: 62%

    Ticker: MGMB

    Exchange: OTC Markets

    Industry: Entertainment

    Trading Stats ($USD millions)

    Market Cap: $3,405

    Enterprise Value: $3,361

    Dividend Yield: 0%

    Price / LTM 2Q13A EPS: 20.4x

    EV / 2013E EBITDA: 9.6xSource: Company filings

    Analyst Details

    IB Username: Mike Winston, CFA

    Employer: Winston Capital Partners

    Job Title: Founder & CIO

    Analyst Disclosure

    MGMB Position Held: Yes

  • 7/27/2019 MGM Holdings, Inc.

    2/5

    IB Equity ResearchOctober 14th, 2013

    Company Details

    Overview

    Buy MGMb (http://www.mgmb.com/) because the stock has 72% upside and 16% downside, a risk/reward ratio of better thanfour to one. MGMb (Metro Goldwin Mayer) is a so-called mini-major movie studio that produces a handful of films each year

    and maintains no physical production facilities. The company also makes TV projects, owns the MGM cable network, and a 19%

    interest in the EPIX cable network. In addition, MGMb owns a content library that includes 4,100 movies and 10,000 TV

    episodes. The content library, TV production and EPIX each add stability to lumpy profits from the movie business. The studio

    was formed in 1924 and releases film and television content under Metro-Goldwyn-Mayer, United Artists and Orion Pictures,

    respectively. Today, MGMb has a 75/25 partnership with Sony on the James Bond franchise until 2015, and a 50/50 partnership

    on The Hobbit trilogy.

    In July 2012, MGMb filed a private S-1 under the Jobs Act. No word yet on the timing of an IPO, but on 9/13/13, management

    adopted a poison pill and announced a $75mm buyback. Each quarter the company posts recent financials to its web site and

    hosts a conference call. Management then removes the prior quarter financials and the replay of the previous call.

    BackgroundKirk Kerkorian has bought and sold the studio numerous times over the past thirty years. The company filed and then emerged

    from a pre-packaged bankruptcy in 2010. The 2010 reorganization followed Kerkorians 2004 sale of MGMb for $5bn to an

    LBO consortium backed by Sony, Comcast, TPG and Providence Equity Partners. While the company was in Chapter 11, Carl

    Icahn made two separate (rebuffed) offers to buy up MGMb debt in order to merge with LionsGate. Icahn was also a major

    shareholder of MGMb until around the time of the S-1 filing, when he sold his stake back to the company for $590mm.

    Today, Highland Capital and Anchorage Capital each own over 10% of the company and have two of the seven board seats.

    Bloomberg reported last month that Third Point (Dan Loeb) had become a top five holder. See the most recent NYT article on

    MGMb for additional background (http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-

    appears-to-be-a-moneymaker.html?pagewanted=all&_r=0 ).

    Valuation

    MGMb has 58.2mm fully diluted shares outstanding at $55.00/share for a market cap of $3.2bn. Net debt is negative $44mm

    ($97mm debt - $141mm cash) and so TEV is $3,156mm. In addition, MGMb has $600mm of federal NOL and $700mm of

    California State NOL. If we convert the NOL to its present cash value we can subtract that amount from TEV. So $600mm x

    35% tax rate = $210mm tax credit and $700mm x 10% state tax rate = $70mm tax credit, or $280mm cash value on a combined

    basis. To be conservative we can discount $280mm by roughly 1/3, leaving $200mm. Adjusted TEV would then be $3,153mm -

    $200mm = $2,956mm, call it $3bn.

    MGMb generated $286mm of EBITDA in 2012A and management has guided to a high single digit increase in 2013, so at just

    shy of 9% growth, 2013E EBITDA would be $310mm. LTM EBITDA was $383mm because of a boost from the theatrical

    release of Skyfall in 4Q12 and The Hobbit in 1Q13.

    Today the stock trades today at $3bn/$310mm = or 9.6x 2013E EBITDA (technically $2,956mm/$310mm = 9.5x). If MGMb

    priced at 17x, in line with its closest peer, LionsGate, the shares would be worth $95. If MGMb were to continue to trade on the

    same 9.5x but missed $50mm of forecast EBITDA because of a cinematic flop (and added $50mm of leverage), then the stock

    would be worth $46 (-16%). Given the 7.5x discount between MGMb and its peer its difficult to make a multiple contraction

    argument, so Ive chosen to think about the downside in terms of leverage and the major uncertainty surrounding any movie

    businessbox office success.

    http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0http://www.nytimes.com/2013/09/09/business/media/latest-overhaul-of-the-MGMb-studio-appears-to-be-a-moneymaker.html?pagewanted=all&_r=0
  • 7/27/2019 MGM Holdings, Inc.

    3/5

    IB Equity ResearchOctober 14th, 2013

    EBITDA and Free Cash Flow are similar here business because the company has no net debt, limited cash taxes and little or no

    capex requirement. For example, capex was less than 1mm both the first half of this year and in the first half of the prior year

    period.

    Film Production Market

    Six major studios produce 10-30 films per year, and account for an estimated 90% of gross domestic film rentals. MGMb, as

    mentioned earlier, seeks to produce only a handful of films, and has co-production arrangements with Sony, New Line/Warner

    Brothers, and Paramount respectively.

    To produce a blockbuster film requires $100mm-$250mm on average. Iron Man 3 and John Carter (neither were MGMb

    pictures) serve as reasonable case studies. Iron Man 3 had a $200mm production budget and generated $1.2bn globally at the

    box office. John Carter, however, cost $250mm and Disney had to take a $117mm write down.

    Gary Barber (CEO) grew up on the production accounting side of the business and enjoyed tremendous success as co-founder of

    Spyglass pictures before being asked to run MGMb (http://www.filmbug.com/db/344022). Barber prefers what he considers

    lower risk-projects and likes to bring in a financial partner to protect the balance sheet. Aside from having negative net debt,MGMb has $750mm available under an undrawn revolver facility and so has plenty of capital to selectively finance/co-finance

    projects.

    During the balance of 2013 MGMb will release the second installment of The Hobbit (opening 12/13/13) and the remake of

    Stephen Kings Carrie. In 2014, the studio will release the third Hobbit movie, the remakes of Robocop and Poltergeist, and t he

    sequel to 21 Jump Street (Jonah Hill/Channing Tatum). Also in 2014 MGMb will release the story of Hercules, featuring action

    star Dwayne Johnson. The next James Bond film is planned for release in 2015, after which Sonys contractual rights to any ne w

    Bond movies expire.

    Its not accidental, given the CEOs conservative strategy, that the 2014 slate includes a franchise film (The Hobbit), two

    remakes of existing commercial successes, an inexpensive comedy sequel and a universally known myth likely to translate well

    abroad (and featuring a star with box office appeal).

    MGMb Film Library & EPIX

    The companys film and television library generates EBITDA of roughly $200mm, again, with little or no capital spending

    requirement, so on say 8x the library accounts for $1.6bn of the value of the $3bn equity value. If the movie business went away

    the library would eventually degrade and would lack the ability to bundle old films with new (matched sets DVD of The Hobbit,

    James Bond anniversary editions etc.). So, the library is more valuable when attached to the production business.

    Income from the EPIX cable channel is not part of EBITDA, but rather equity income. MGMb records approximately $20mm a

    year from EPIX and as a 19% holder that implies overall net income of roughly $105mm. Cable channels such as SNI, DISCA,

    STRZA and AMCX trade 15-20x earnings. So, EPIX should be worth $1.5-2.0bn, and MGMbs 19% stake should be worth

    $285-$385mm or $4.90-$6.53 per share. So, to be conservative lets say it worth $300mm, or about $5.00/share.

    So, from a fundamental perspective 2/3 of the value of the company comes from relatively stable sources ($1.6bn library +

    $300mm EPIX = $1.9bn, and $1.9bn/$3bn = 63%, or just shy of 2/3).

    MGMb TV Production

    MGMb currently produces Vikings on the discovery channel and Teen Wolf, now in its third season on MTV. Content creators

    such as MGMb enjoy a secular tailwind because cable channels understand that the key to higher affiliate fees rests with having a

  • 7/27/2019 MGM Holdings, Inc.

    4/5

    IB Equity ResearchOctober 14th, 2013

    show people see as a must have (Boardwalk Empire on HBO, Homeland on Showtime, Mad Men on AMC, House of Cards on

    Netflix etc..).

    In a TV contract, the acquiring network pays for the cost of the production of a pilot episode. If they like what they see, then the

    buyer pays for the series ratably over time. Unlike feature film investment and financing, there is minimal speculative capital risk

    to MGMb when it creates and sells a TV series.

    Management Incentive

    Insiders have 9.7mm options (of 12.9mm available in the plan) with struck at an average price of $37/share. Options immediately

    vest upon a change of control. So, management is already (($55-$37) x 9.7mm) = $174.6mm in the money in the event of a sale.

    Every point of share price appreciation generates $9.7mm of pre-tax gain for the options pool.

    Conclusion

    Buy MGMb because it has 72% upside and 16% downside, a risk/reward ratio of better than four to one. The business has no net

    debt, $750mm of liquidity and a solid 2014E slate of projects in addition to profits from its library, EPIX and TV production. An

    S-1 has already been submitted privately and managements recent filing of a poison pill suggests takeover activity. Recall that

    this studio has traded hands numerous times, and that the largest holders today are hedge funds that would welcome the

    opportunity to report gains to their investors.

  • 7/27/2019 MGM Holdings, Inc.

    5/5

    IB Equity ResearchOctober 14th, 2013

    Financial Overview

    (000 USD)

    2007 2008 2009 2010 2011 2012 LTM2Q13

    Revenue $1,244.6 $1,224.0 $1,120.6 $861.8 $699.1 $1,379.7 $1,892.6

    Operating Costs 811.5 769.5 1,374.3 1,194.7 400.6 818.7 1,157.1

    Gross Margin 433.1 454.5 (253.7) (332.9) 298.5 561.0 735.5

    Distribution & Marketing 157.1 183.4 262.3 144.5 90.9 307.9 397.1

    General & Admin 297.5 294.5 129.9 138.5 111.8 106.0 97.4

    D&A Non-Film Amortization 19.0 18.8 19.2 18.5 16.8 19.0 18.7

    Impairment Charges - - 1,411.1 129.2 - - -

    Operating Profit (40.5) (42.2) (2,076.2) (763.6) 79.0 128.1 222.3

    Equity Earnings of Affiliates 5.1 1.5 (19.7) (12.4) 21.7 14.6 15.4

    Contractual Interest Expense (517.5) (511.7) (774.3) (986.2) (25.2) (23.9) (25.2)

    Amortization of Financing Costs - - (48.9) (926.7) (4.5) - 9.0

    Interest Income 16.9 9.3 6.8 6.3 5.2 4.0 3.6Debt Extinguishment Gain (Los - - 2,294.2 6,031.2 - - -

    Gain (Loss) on Sale of Assets - - - - - 104.1 48.4

    Other (42.0) (79.1) 28.7 0.4 (1.6) 1.6 -

    EBT (578.0) (622.2) (589.4) 3,349.0 74.6 228.5 273.5

    Tax Benefit (Provision) 1.9 25.3 25.0 (71.8) (39.4) (99.4) (116.5)

    Net Income (576.1) (596.9) (564.4) 3,277.2 35.2 129.1 157.0

    D&A 19.0 18.8 19.2 18.5 16.8 19.1 18.7

    EBITDA (21.5) (23.4) (2,057.0) (745.1) 95.8 147.1 241.0

    Step-up Amortization - - - 194.9 62.9 117.5 129.1

    Non-Recurring Costs - - - 44.5 13.0 4.2 (0.8)Stock Based Comp 9.3 6.8 1.3 0.9 21.4 16.9 13.6

    Impairment - - - 129.2 - - -

    Adjusted EBITDA ($12.2) ($16.6) ($2,055.7) ($375.6) $193.1 $285.7 $382.9

    % Margin - - - - 27.6% 20.7% 20.2%

    Last Trade 55.00$ Fully Diluted S/O (mm) 58.2

    FD Shares 58.2 LTM Net Income/Fully Diluted S/ 2.70$

    Mkt Cap 3,201

    Cash 141

    Debt 97

    Net Debt (44)

    NOL 200TEV $2,957

    TEV/EBITDA

    LTM EBITDA $383 7.7x

    '13E EBITDA $310 9.5x