What Amazon’s $8.45 Billion Deal for MGM Means for the Film Studio Industry
The much-rumored selling of MGM came to an agreed upon close on May 26th, as Amazon agreed to buy the former “big five” studio for $8.45 billion. MGM has been around since the 1920’s and has published some of the most revered and popular films of all time such as Gone With the Wind, Rocky, Doctor Zhivago, Ben-Hur, 2001: A Space Odyssey, and the James Bond franchise. Today, MGM revenue is largely from middle-earning films that are neither large blockbusters nor particularly expensive with few modern assets of their own in terms of franchises to offer Amazon. In fact, Amazon is reported to have paid over 40% above the offers made by Apple and Comcast to acquire MGM.
So the question is, why? All streaming services have been trying to acquire independent studios for the past decade with the rise of streaming. This year we have had a WarnerMedia and Discovery merger to bolster the HBOMax platform and just two years ago we saw Viacom reuniting with CBS in order to have a competitive streaming service of their own in Paramount Plus. Of course, the recent buying was probably kickstarted by Disney’s large purchase of 20th Century Fox, which was much larger than MGM and had a presence of back catalog films across all streaming services. As players like Disney were grabbing up available back catalogs and franchises, the other streaming services had to try to buy their own studios to add to their streaming catalog to maintain competition.
The addition of MGM franchises with future earning potential to Amazon might legitimately be pretty low. James Bond is a crown jewel of a franchise. An occasional billion-dollar earner at the box office does not become available very often, none have been successful for as long as James Bond. Beyond that? Rocky, Legally Blonde, and Pink Panther are successful franchises, albeit a bit lackluster in 2021. Even James Bond, as great a franchise there is, is only 50% owned by Amazon as longtime Bond producers, Barbara Broccoli and Michael Wilson, control the other 50%.
To put it simply, while future content looks perhaps a bit dire in terms of franchise potential, the content added to Amazon’s platform is going to be vast. The addition to Amazon Prime’s catalog of films will be impressive with a total of 4000 films and 17000 television episodes owned by MGM. Once current streaming deals expire, or if Amazon buys back the streaming rights, we should see the vast majority of those titles on Amazon Prime.
Was $8.45 billion a fair number for MGM’s valuation? It was not too long ago we saw much more dominant franchises bought by Disney for much less; Lucasfilm and Marvel were each acquired for $4 billion at the time of sale. Bond’s net present value, assuming a release every three years and returns of about $240 million profit per film, is around $1.5 billion, so Bond alone is probably worth in the $1-2 billion range depending on the discount rate and opportunity for growth going forward. With Amazon owning half of the franchise, we can say their 50% ownership of Bond is worth about $750 million, give or take $200 million based on market sentiment. The company as a whole had a market value of close to $5.5 billion based on privately traded shares, giving Bond somewhere in the 20% range of the entire value of the company.
Out of bankruptcy in 2010, MGM traded for around $17 per share on the private market and went as high as $120 per share in 2018 amidst rumors of an Apple deal for the studio. In 2018, after the firing of MGM CEO Gary Barber, partly due to unsanctioned conversations with Apple to sell the studio for around $6 billion, MGM board chairman Kevin Ulrich pitched to studio investors his plan to sell MGM for more than $8 billion within two to three years. Within three years, he personally negotiated to sell MGM to Amazon for $8.45 billion. Factoring in Apple’s valuation of MGM of ~$6 billion and the market share of the company at ~5.5 billion, it is not very shocking for the hot market to have given rise to $2-3 billion additional value for MGM over two to three years. Amazon needed content, content makers are being bought up for their competitors, so they had to make a splash.
The only real potential red flag for MGM is related to its increasing debt over the past few years. Revenue was increasing every year until COVID derailed their 2020 plans and the release of the new James Bond film No Time to Die. However, MGM has been accumulating debt faster than revenue. This debt was driven by investments on content, something Amazon is familiar with themselves for their original content. Taking on debt to grow MGM’s content library and revenue was probably a smart strategy to appear more valuable to a streaming service. Amazon will be fine with the costs associated with creating content, as long as it is good content that drives demand for Amazon Prime. It may have even been worth a bit to Jeff Bezos, a frequent target of Trump, to gain control of The Apprentice and access to all the raw footage of the show.
The next question is which studio is next to be bought by a streaming service? Only one of the “big five” movie studios does not have a streaming service, and they have had rumors tied to them regarding the selling of their own studios to a corporation that has a streaming service – Sony. Sony has already stated their film and tv studios are not for sale. CEO Yoshida reiterated the company’s stance on partnering with streaming services while still independently creating content. 20th Century Fox said the same thing, with a valuation even larger than Sony, before being bought by Disney. In today’s hot content market every studio has a price – and the tech behemoths like Amazon have the cash to spend.
Apple is constantly in the news tied to a buying a studio, partially because they have the cash to buy one and partially because their Apple TV+ service has less content than the other services. Sony’s film and television studios are probably the grand prize left on the market, but if it is off the table for now then it may be down to Lionsgate and A24. We are only talking about ~450 films between the two studios, compared with MGM at 4000 films. But at the same time, the films are more modern and with more hits in recent years for Lionsgate such as the John Wick franchise, The Hunger Games, Divergent; and for A24 Hereditary, Lady Bird, and Uncut Gems. A24 in particular seems very synergistic with Apple’s independent and creative branding, and Apple already has a production deal for content in place with A24.