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Deal Chatter Heats Up in Hollywood
Even as the recession squeezes financing from Wall Street banks and funds, the deal chatter has picked up because studios have already cut expenses and are looking for new growth opportunities for their movies, TV series and other content.
Viacom Inc's Paramount Studios is in early talks with several studios, including News Corp's Fox and Sony Corp's Sony Pictures, to cut costs by combining DVD manufacturing and distribution operations, a source familiar with the matter told Reuters on Tuesday.
Time Warner Inc, which owns the Warner Bros studio, is considering a bid for DreamWorks Animation SKG Inc, according to Variety columnist Peter Bart.
And Liberty Media Corp chief John Malone told shareholders last week that Sony Pictures and privately held Metro-Goldwyn-Mayer could be up for sale soon.
"What we're hearing is everybody's talking to each other on how to get joint ventures and structure costs," said veteran investor Mario Gabelli, whose Gamco Investors owns Viacom stock. "It's driven by how do you reduce costs, how do you raise financing, how do you distribute products globally."
With little hope of DVD sales picking up -- as online and mobile technologies change the way people view entertainment -- media bankers expect consolidation, but say more studios will prefer to combine units or strike partnerships and joint ventures rather than buy each other outright.
Traditional M&A may raise the hackles of antitrust regulators since there are only six major studios and a handful of smaller players, one banker said. "Studios will tend toward creating JVs to bring them together so that there is some pricing power over content," the banker added.
Acquisitions could also present integration challenges on the theatrical side of the business because of different movie production schedules, a second banker said.
"Everyone thinks studio consolidation makes a lot of sense," said a third banker. "There is tremendous overhead that can be reduced. But it's difficult given the egos and personalities involved."
Media moguls, from movie titans Harvey Weinstein and Jeffrey Katzenberg to overlords Sumner Redstone and Rupert Murdoch, have been invited to attend an annual retreat in Sun Valley, Idaho, next week, where they may well plot deals.
Bankers and analysts say cable companies like Comcast Corpcould make a play for the rich content libraries that studios own. Comcast, the No. 1 U.S. cable operator, already owns a stake in MGM, which also counts private equity firms Quadrangle and Providence Equity Partners among its owners.
A fourth media banker suggested that Lions Gate Entertainment Corp could be a good fit for Comcast because it could transform the independent studio's wealth of content into a cable network.
All four bankers requested anonymity because they do business with these studios or their parent companies.
Gamco analyst Chris Marangi said the popularity of video-on-demand could spur Time Warner Cable Inc and Cablevision Systems Corp to seek more content deals but added these smaller cable operators were unlikely to want to buy a studio and get into content creation themselves,
Some said Paramount itself could be up for sale some day.
"Despite the enormous success of 'Transformers', Paramount has been a drag on Viacom earnings from the perspective of Wall Street analysts," said David Molner, managing director of Screen Capital International, which has conducted more than $7 billion in media and entertainment financing.
Molner, a former Paramount executive, added that Viacom has scaled down the studio's operations "to an extent that disposing of it today would be a lot more thinkable than several years ago when it was a bigger entity."
He said News Corp, Sony or Time Warner could absorb the trimmer Paramount if it were in play, while Lions Gate and the debt-ridden MGM are unlikely suitors.
Bankers generally see the major studios as possible buyers, and smaller rivals like Lions Gate, MGM and Dreamworks Animation as potential targets.
Most of these studios trade at about 6 to 7 times earnings before interest, taxes, depreciation and amortization, the fourth banker said, adding that the value of MGM is at par or below its total debt of $3.7 billion.
Investor Carl Icahn tussled with Lions Gate earlier this year, calling its expenses extremely high and seeking board seats. Icahn was also rumored to be buying up MGM debt with the goal of forcing a merger of Lions Gate and MGM, but any such plan has not seen the light of day.
Gabelli said investor activism was tough in the movie business because studios are usually owned by huge conglomerates. "Nobody's going to pressure Murdoch to do anything or Sumner Redstone or Jeff Bewkes," he said, referring to the heads of News Corp, Viacom and Time Warner.
Rather, media companies are taking the initiative in dealmaking among movie studios as they search for new sources of profit or seek to dispose of ill-fitting assets.
(Additional reporting by Sue Zeidler and Gina Keating in Los Angeles; Editing by Tiffany Wu and Steve Orlofsky)
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