Acquisition Overview
Nearly a year after Amazon.com, inc. (NASDAQ: AMZN) announced on May 26 2021 that it would buy Metro-Goldwyn-Mayer Studios Inc. (OTCMKTS: MGMB), as of March 17 2022, the acquisition has been completed for a total of $8.45bn, making it the second largest acquisition in Amazon’s history. This deal will cement Amazon’s position in media and film, with the acquisition of MGM bringing partial ownership over franchises such as James Bond, The Handmaid’s Tale, and Vikings. Moreover, Amazon has been seeking to improve the offering of its approximately £100 a year video subscription service, Amazon Prime. The completion of the transaction comes just two days after the European Union’s antitrust regulator gave it the green light because of minimal overlap between the two companies and since “MGM’s content cannot be considered as must-have”.
Deal Structure and Peculiarities
The deal, in which Amazon paid a 60% premium over MGM’s $5.5bn previous bids, was unusual for a couple of reasons. The 60% premium raises the first question, with Apple, Netflix, and NBCUniversal all reportedly interested when MGM first came up for sale in May 2021, before walking away from the deal.
Further, the process of valuation used in the deal differed from that usually employed. Traditionally, film library valuations, used to assess the value of the studio, have operated thus: titles are sorted into 4 categories, A to D, and the appraiser has to assess where each film is in the sales cycle and what sort of profit each title is likely to bring in; then, an average sales price is gathered for new titles and sales history is analysed to determine what each film is likely to bring in on renewal when compared with its sale in the previous cycle; expenses – sales fees, administrative expenses etc. – must also be factored into the valuation. However, in the case of the Amazon-MGM deal Amazon was willing to forego the traditional valuation methodology by presenting MGM with a deal, $8.45bn, which it couldn’t refuse.
It had been expected that the Federal Trade Commission might block the deal, yet with the mid-March deadline for a declaration on the transaction now passed, the merger was not considered a large enough threat to antitrust regulation to merit this. This comes as a surprise for two reasons. First, antitrust reviews are usually conducted for film studios by the US Justice Department, and were only conducted by the FTC since it had already been conducting a two-year long investigation into Amazon.
Second, FTC chief Lina Khan is an outspoken opponent of Amazon’s growth, arguing in an article published while she was at Yale that US antitrust law had failed to restrain the e-commerce giant. However, the relatively small market share of MGM, coupled with the dominance of Amazon in areas apart from film and its relatively minor interests in this sector, made the deal an unlikely one for the FTC to block. Moreover, Khan lacked the required sway over the commission to bring a lawsuit.
The nature of the deal means that it could, hypothetically, be unwound in the future, particularly if President Biden is able to get his nominee to the FTC, Alvaro Bedoya, through the Senate. Nonetheless, the deal comes as a relief to MGM shareholders, particularly since the European Union has granted the deal unconditional antitrust approval. Once stuck with an illiquid stock, investors are now rewarded with an Amazon willing to pay far more than expected for the company.
The deal includes the studio, over 4,000 movie titles and 17,000 television episodes. Management of MGM will fall under Mike Hopkins, Senior Vice-President of Prime Videos and Amazon Studios. Paul, Weiss, Rifkind, Wharton & Garrison and Latham & Watkins are advising Metro-Goldwyn-Mayer Studios Inc., and Cravath, Swaine & Moore is representing Amazon.
Metro-Goldwyn-Mayer Overview
Founded in 1924 from Metro Pictures, Goldwyn Pictures, and Louis B. Mayer Pictures, Metro-Goldwn-Mayer Studios Inc. is an American media company that produces and distributes films and television programs. The studio is based in Beverly Hills, California, and headed by Chris Brearton as COO, Michael De Luca as Chairman, and Pamela Adby as President. Following a prosperous era as one of Hollywood’s “big five” film studios, in 1969 Kirk Kerkorian purchased 40% of the studio and diversified its products, later selling it to Ted Turner in 1986.
More recently, MGM has produced films such as House of Gucci, Licorice Pizza, and Candyman, and owns or partially owns the James Bond franchise, the Pink Panther franchise, and the Stargate franchise, among others. In 2010, MGM filed for Chapter 11 bankruptcy protection and reorganisation, emerging a year later under the ownership of its creditors. However, with the departure of Gary Barber, former co-chairman and co-CEO of MGM Holdings, Inc., the studio once again looked for a buyer to pay its creditors, a position filled, ultimately, by Amazon. Presently, it has a market cap of approximately $3.571bn, a TTM gross profit of $597.74m, and an Enterprise Value of $7.526bn.
Amazon Overview
Amazon is a company that needs less introduction. The e-commerce giant, founded in 1994 by Jeff Bezos and currently headed by himself and Andy Jassy, has revolutionised online shopping. Headquartered in Seattle, Washington, the company has also developed several subsidiaries, namely Amazon Web Services, Zoox, Kuiper Systems, Amazon Lab126, Ring, Twitch, IMDB, and Whole Foods Market (its largest acquisition at $13.4bn in 2017). More recently, Amazon has made a foray into media through its Prime subscriptions service and various media-based units: Amazon Prime Video, Amazon Music, Twitch, Audible, and Amazon Studios. Presently, it has a market cap of approximately $1.71tn, a TTM gross profit of $197.48bn, and an Enterprise Value of $1.73tn.
Industry Insight
During the past two years, the landscape of consumer media has changed. With the rise of working from home, digital media consumption has risen, and so the importance of TV series, feature films, and documentaries, among other forms of televised media, has risen accordingly. In 2020, the value of the global film and video market reached a value of nearly $234.9bn, with a compound annual growth rate of 2.4% since 2015.
The market is expected to reach $318.2bn by 2025, and with the headway made by companies such as HBO and HULU, television, in contrast with film, may become an even larger part of this market. Furthermore, the locations of film production, though still centred in the United States, are become more diverse, with studios such as the UK’s Pinewood Studios becoming increasingly relevant in the industry.
Strategic Rationale
The motivations behind Amazon’s purchase of MGM – for $3bn more than the initial valuation, no less! – are manifold. First, and most obviously, Amazon wants to extend its reach into an ever-growing and fast-developing media market. This reach has already been established through Amazon Prime, and with the immense amounts of cash possessed by Amazon, currently totalling c. $71bn, Amazon has the resources with which to establish a strong foothold in the production industry. MGM provides the name, a name fit to rival Disney and Warner Bros, through which Amazon can channel its capital arsenal into the film and television industries.
Second, MGM brings a plethora of films and TV programmes with it. These will provide Amazon with a steady, if slowly diminishing source of income. Moreover, Amazon now controls Epix, the Premium TV channel owned by MGM, and their extensive library of programs. This increases the value of their Prime subscription through the wealth of newly-available content, and the power of MGM gives Amazon the ability to produce many more Amazon-exclusive shows targeted solely at their Prime customers.
Third, in acquiring MGM, Amazon has purchased one of its competitors in the television industry, albeit a small one, giving it an increased market share and the ability to produce films on a greater scale than Amazon Prime Video formerly allowed.
Fourth, and most interestingly, Amazon has a reputation problem. It was never going to be easy for a company with a CEO worth approximately $180bn dollars to keep a clean reputation, and with the recent unionisation of workers at the JFK8 warehouse in New York, working conditions in distribution centres are being considered in a critical light.
Nor is this a novel concern for the company. In 2016, reports emerged that organisers of a unionisation drive in Chester, Virginia, were derided as “a cancer” to the workplace; in 2020, Amazon hired anti-union lawyers Morgan, Lewis & Bockius, the same firm they used to combat a Delaware unionisation effort, to counter unionisation efforts in Bessemer, Alabama. Though the vote failed, a National Labor Relations Board investigation found that “a free and fair election was impossible”, while the Retail, Wholesale and Department Store Union filed unfair labor practice charges against Amazon. This factor, coupled with the e-commerce giant’s deteriorating public image, makes it essential that Amazon takes steps to counter this. The acquisition of one of the world’s largest television producers gives Amazon the ability to produce media tailored however it sees fit.
Long-Term Prospects
Metro-Goldwyn-Mayer Studios Inc. has long been on the down, yet, with Amazon cash behind it, it may finally see a reversal of its fortunes. MGM remains one of the largest names in film and television production, and the financial assets of Amazon it will be able to expand into new mediums and markets and offer significant payments to actors, producers, directors, and crews. Moreover, with direct access to Amazon Prime, the partnership removes the middleman and allows Amazon to produce what it wants, when it wants, for its own paying audience.
Last month, the US government approved the merger of WarnerMedia with Discovery, creating a streaming behemoth the likes of which Amazon perhaps hopes to rival. Such mergers ultimately mean less choice for consumers, and consolidation in the market will doubtless continue, particularly as trillion-dollar tech companies take to the field. However, the state of play in the world of media is complex and fast changing. All that can currently be said is that Amazon’s acquisition of MGM is a tour de force which will reinforce its reach, influence, and reputation.
Written by Tom Elliott (New College, University of Oxford)
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