Deal Could Be Unwound In The Future

Many had expected the Federal Trade Commission (FTC) to block the acquisition of MGM by Amazon, but in a surprise move, they chose not to do so. Bigger fish to fry? FTC chief Lina Khan has made it known that she is unhappy with how large some of these tech companies like Amazon have become, and in fact issued a letter to Amazon that the FTC will continue to investigate the purchase of MGM.

She wrote a very popular article while at Yale Law School that argued that U.S. antitrust law has failed to restrain Amazon.com. The studio does have some great film & TV titles in its library including “The Hobbit”, the James Bond franchise and the “Handmaid’s Tale”. However, its small size in comparison to other motion picture distributors made it an unlikely transaction for the FTC to block.

Ms. Khan did not have enough votes on the commission to back a lawsuit, but she could if President Joe Biden is able to get his nominee Alvaro Beydoya through the Senate. That means this deal could actually be unwound in the future, although that would be tricky logistically (they could likely force Amazon to sell all or part of MGM).

In the meantime, it’s great news for former investors in the company, which were stuck with an illiquid stock worth well below what Amazon was willing to pay for it. The $18.5 billion included the studio, more than 4K movie titles and 17K TV episodes. Management of the studio will fall under Mike Hopkins, SVP of Prime Video and Amazon Studios

Amazon paid a 60% premium over the $5.5 billion market cap of the studio when it went on the block in December of 2021. Apple, Amazon, Netflix and NBCUniversal reportedly kicked the tires at that time and walked away. Amazon was willing to pay a much higher price.

Although an antitrust review was expected, for film studios this typically comes via the U.S. Justice Department. However, the FTC asked to do the review since it had already been doing a two year long investigation into the e-commerce giant.

Most movies do not make money and studios have to structure deals carefully so that they own most of the upside on franchise films (MGM, unfortunately, has a partner on its most popular franchise the James Bond films, the family of Albert Broccoli, which has final say on distribution and marketing decisions and receive 50% of the profits).

This deal is the reverse of how most film deals work, with most studios taking on partners that have most of the risk on the film, with the studio taking a hefty fee off of the top. The model with Amazon will likely be much different, with movies produced that are clearly targeted at their Amazon Prime customers. Old library titles which are licensed to TV stations all over the world are unlikely to be renewed and will become exclusive on Prime Video. It’s unclear whether Epix, the Premium TV channel owned by MGM will stay on the air after the merger.

Historically, film library valuations have been very complicated and tedious. Titles are sorted into groups, A, B, C, D and then the appraiser has to figure out where the film is in the sales cycle in each territory, for each window (Pay TV, Free TV, etc.). This is very time consuming.

An average sale prices is gathered for new titles and then the sales history is analyzed to determine a deflator based on what each title gets on renewal versus its sale in the previous cycle. Expenses like sales fees, G&A and profit participations and residuals are deducted, and the sum of the cash flows are discounted back to present value and then a residual value is added.

However, in the case of the MGM transaction, this type of methodology is thrown out the window. Beauty is in the eye of the beholder, and Amazon clearly thinks they can milk more value out of the library than just selling the titles through traditional sales channels,