- The Washington Times - Saturday, August 17, 2002

SANTA MONICA, Calif. — Secret agent James Bond in November once again will save the world and raise the fortunes of Metro-Goldwyn-Mayer Inc., the studio releasing the 20th installment of Hollywood's longest-running film franchise.

The venerable MGM had hoped to wean itself by now from the financial fix provided by Bond films. But after two years of new management appointed by MGM's principal shareholder, billionaire Kirk Kerkorian, the company still finds itself struggling to deliver consistently profitable films and unable to pursue its larger goal of transforming itself into a major media company.

Chief Executive Alex Yemenidjian has long said MGM needs to gain more direct access to viewers in the same way rivals AOL Time Warner Inc. and the Walt Disney Co. have done through major acquisitions.

"We've consistently stated we need to be a part of a larger organization," Mr. Yemenidjian said during a recent conference call with analysts. "Our preference is to be the surviving entity, the acquirer, and to grow MGM and give it more scale, more diversified revenue streams and more vertical integration. Nothing has changed in that regard."

The company has diversified, buying a stake in four domestic cable channels as an outlet for its films and other programs. But apparently unhappy with the pace of such efforts, MGM late last year started shopping itself around, touting the value of its library of more than 4,000 films. So far, there have been no takers.

Meanwhile, media stocks have dropped sharply with the rest of the market. MGM's stock, which could have been used as currency in an acquisition, is trading at close to $10, down from its 52-week high of $23.25. Companies likely to be interested in MGM are having problems and are conserving cash.

In its most recent quarter, MGM doubled its losses, posting a net loss of $121.8 million, and reconfirmed its earlier expectation of a net loss in its shares of between 85 cents and 89 cents for the year.

Mr. Yemenidjian "pulled all the levers he could, and it's gone as well as you could expect," said Harold Vogel of Vogel Capital Management. "But it's a relatively small fish swimming in a giant sea. It's late in the game for acquiring or building cable networks or acquiring competitive distribution assets. They're doing a great job in a difficult environment."

MGM has taken steps since 1999 to become less dependent on the notoriously unreliable first-run feature film business. It has started MGM-branded cable channels reaching 34 million subscribers in 40 countries outside the United States, is producing several popular cable television shows and is turning its vast film library into cash-producing DVD releases.

And it bought a 20 percent interest in four cable channels owned by Rainbow Media American Movie Classics, Bravo, the Independent Film Channel and WE: Women's Entertainment and recast its United Artists division as an independent film label.

The company also is licensing some of its films for live-action theatrical events, including "Chitty Chitty Bang Bang," a hit in London.

However, compounding MGM's woes is a series of box office missteps, including the big-budget John Woo film "Windtalkers" that cost about $110 million to make and market but has earned only about $40 million at the box office since its June premier.

The studio's only recent hits were last year's "Heartbreakers," with Sigourney Weaver and Gene Hackman, and "Legally Blonde," a comedy starring Reese Witherspoon that will spur a sequel, "Red, White and Blonde," with a television show and possibly a Broadway musical.

MGM also scored big with last year's "Hannibal," the sequel to the 1991 film, "Silence of the Lambs." But in a move that reflected the fiscally conservative regime, MGM had only a 50 percent interest in the film.

Executives said they have learned from their mistakes and are limiting their exposure to future theatrical releases. Next year's slate of seven films will have an average cost of less than $25 million each, MGM said.

By lowering its risk on new films, MGM hopes to score bigger overall profits.

"Our job is to create a portfolio effect that reduces the volatility of the current-release business, and I think you will see us doing an even better job of that going forward," Mr. Yemenidjian recently told analysts.

While MGM has failed to interest a buyer, speculation builds that it may be planning an acquisition.

The company issued new stock recently and renegotiated a credit line, giving it $1 billion in addition to whatever additional cash Mr. Kerkorian might agree to invest.

The most likely move would be for MGM to buy at least a controlling interest in the four cable channels owned by Rainbow Media, a venture between Cablevision Corp. and NBC. MGM paid $825 million for its 20 percent stake and has expressed interest in increasing that share.

"We have always said we would be willing to invest in a controlling interest in the Rainbow channels," Mr. Yemenidjian said recently.

In the short term, MGM might have to wait until its box office fortunes turn and boost its stock price. The big question is whether Mr. Kerkorian, who bought the studio in 1970, will wait that long.

"Kirk is not gaining net worth with this investment," Mr. Vogel said. "But Mr. Kerkorian has the depth of capital to hold on for a long time and wait until the cycle turns around."

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