Time Warner's New Growth Plan: Buy MGM

Time Warner (TWX) has spun out its Time Warner Cable (TWC) operation and AOL (AOL). That has left the company with TV programming, magazine, and studio assets. Wall St. has been waiting to see what the huge entertainment conglomerate would do to begin expanding again and use the large amount of cash its has on its balance sheet due to its divestiture of its cable TV business.

Time Warner answered some of the questions about its future as it bid as much as $1.3 billion in cash for movie studio MGM.  MGM is for sale because it has failed to make interest payments on $3.7 billion of debt.

According to BusinessWeek, “The Los Angeles-based studio owns a 4,100-film library and has a co-production deal with Warner Bros. for movies based on J.R.R. Tolkien’s novel “The Hobbit.” The studio was taken private for $5 billion in 2005 by buyers including Providence Equity Partners.” That would seem to make the $1.3 billion price tag a bargain.

Investors have been anxious for more than a year to see what Time Warner Chief Jeff Bewkes would do to expand the company further into its remaining businesses. An MGM transaction would be telling. MGM can be married with Warner Bros. which will almost certainly allow Time Warner to cut costs between the two studios. The transaction would also help it compete with the studio businesses owned by Viacom (VIA), News Corp (NWS), NBCU, and Sony (SNE).

As the price to produce movies increases and the income from DVDs falls, film libraries gain a special value and MGM has one of the largest in Hollywood. Old movies are a nearly endless source of sales set against the modest cost base of editing, marketing, and distributing DVDs of library content.

Bewkes is about to make a fine deal, if he can close it. MGM would round out the Time Warner studio portfolio and prove that the company’s CEO has plans beyond simply divesting businesses that do not match his plans and putting nothing in their places.

Douglas A. McIntyre