Miramax needn’t be an MGM disaster sequel

August 10, 2010

One of Hollywood’s biggest flops has been Metro-Goldwyn-Mayer. So Tinseltown financiers are understandably puzzled over what looks like a forthcoming sequel to the MGM solvency horror story: a buyout of Miramax.

From the opening credits, the $660 million deal resembles the 2004 takeover of the studio behind James Bond by Providence Equity Partners and TPG. The starring roles this time go to Colony Capital and a California real estate executive, Ronald Tutor. They paid substantially more than other bidders — including Miramax founders Bob and Harvey Weinstein — were offering.

Moreover, the investment strategy is predicated on the idea of milking Miramax’s storehouse of some 700 films. That was the same premise of the MGM buy and its $4.9 billion enterprise value. But the script didn’t go as planned, leading to MGM’s private equity owners pretty much washing their hands of the deal. Bidders for MGM have valued its assets at around $1.6 billion and its lenders have granted the company forbearance on its loans until next month. In short, it’s not a winning formula.

But Colony hasn’t necessarily lost the plot. First, MGM sold for more than eight times operating cash flow, while Miramax is priced at half that multiple. This reflects perceived film library values today compared with the MGM deal six years ago, when DVD sales were peaking and digital downloads were a thing of the future.

The financing storyline takes a fresh twist. MGM’s capital structure had just an 18 percent slice of equity. Miramax’s buyers, by contrast, are expected to borrow against receivables of around $300 million, thus writing an equity check of around 55 percent.

Miramax’s unloved status is another noticeable difference. For the past few years, it has been an orphaned asset inside Walt Disney, which has understandably focused on pirates and princesses. Miramax’s budget was slashed long ago when Disney stopped making new films under the Miramax umbrella.

So Colony will have a business in need of TLC, including licensing films for sequels and signing digital deals with distributors like Netflix. Finally, the Colony partner leading the acquisition is the same man who bought Miramax for Disney in 1993 for $80 million. Given all that, avoiding an MGM repeat doesn’t seem so fantastical.

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