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Amazon’s $8.45bn Acquisition of MGM Studios

By Mariona Planella Boix, Ismael Fathy Martínez, Pau Rodríguez Coll and Yair Trachtenberg (ESADE), Rahul Mepani, Athean Myat, Joshua Figueroa, Kevin Hwang and Suchritha Patlolla (Cornell University)

Photo: The Nix Company (Unsplash)

 

Overview of the deal


Acquirer: Amazon

Target: MGM Studios

Implied Equity Value: $6.5B

Total Transaction Size: $8.45TheB

Closed date: Subject to regulatory approval


Amazon is set to acquire MGM Studios for $8.45 billion including debt, which will be the company’s largest acquisition since its $13.7bn purchase of Whole Foods in 2017. This transaction reinforces Amazon's ambition to further expand its streaming services and compete for a leading position in what is becoming an increasingly competitive space following the streaming platform launches of well-renowned companies such as Disney, Apple, WarnerMedia, Comcast and Discovery amongst others over the past 18 months. The increase in competition has led to the highest M&A deal volume in the media sector since 2000 as “streaming competitors are using M&A to increase scale and be better positioned to create and acquire exclusive content, which is critical to driving subscribers,” as stated by Marco Caggiano, co-head of North America M&A at JPMorgan. Amazon’s acquisition of MGM Studios is a strategic transaction that will help Amazon continue attracting and retaining new members to its $119-a-year Prime membership scheme following the company’s $11bn spent on content in 2020, up from $7.8bn in the previous year.


“The real financial value behind this deal is the treasure trove of IP in the deep catalog that we plan to reimagine and develop together with MGM’s talented team” - Mike Hopkins, Senior Vice President (Prime Video and Amazon Studios)

Company Details: (Acquirer - Amazon, Inc)


Amazon is an American global e-commerce and cloud computer conglomerate. The company started out selling books online in 1994 led by Jeff Bezos, and nowadays it is the largest internet retailer in terms of revenue and market capitalization. It offers a range of products and services, including merchandise and content that it purchases for resale from vendors, those offered by third-party sellers and in-house manufactured products. Although it is best known in the e-commerce business, its biggest segment is AWS, a division that offers a set of technology services, including compute, storage, database, analytics, and machine learning.


Founded in 1994, headquartered in Seattle, Washington (USA)

CEO: Jeff Bezos

Number of employees: 1,298,000

Market Cap: $1.61T (as of 08/06/2021)

EV: $1.59T

LTM Revenue: $386.1B

LTM EBITDA: $51.1B

LTM EV/Revenue: 4.12x

LTM EV/EBITDA: 31.12x


Company Details: (Target - MGM Holdings)


MGM Holdings is an entertainment and media company that produces and distributes film and television content. It is the parent company of Metro-Goldwyn-Mayer (MGM) Studios, Inc. MGM Holdings formed in 2005 after acquiring MGM Studios in a leveraged buyout transaction led by several companies, including Sony Corporation. The firm has an extensive content library, and as of 2020 owns 4000 film titles and over 17,000 episodes of tv entertainment.


Founded in 2005, headquartered in Beverly Hills, California (USA)

Chairman of the Board of Directors, MGM Holdings: Kevin Ulrich

COO, MGM Studios: Chris Brearton

MGM Studios number of employees: 700

MGM Holdings Market Cap: $3.64B as of 31/03/2021

EV: $5.42B

LTM Revenue: $1.44B

LTM EBITDA: $286M

LTM EV/Revenue: 3.76x

LTM EV/EBITDA: 18.95x


Projections and Assumptions

Short-term consequences


Amazon’s acquisition of MGM is launched amid a major consolidation trend from media, including Disney-Fox, Viacom-CBS and AT&T-Time Warner. The deal is another big step to strengthen Amazon’s fight in the streaming wars, adding more than 4,000 films and 17,000 TV shows. Once the deal closes, this transaction will involve unrestricted access for Amazon's Prime Video platform, giving the service a leg up against rivals like Netflix, Hulu and HBO Max, being the main short-term consequence. In the end, the key driver of the deal is to force consumers to subscribe to its $119-a-year Prime membership scheme.


In the words of Jeff Bezos, these investments reinforce Amazon’s “flywheel effect,” as it attracts more Prime subscribers, who in turn, tend to spend more on the site. In fact, the purchase will enhance Prime Video offerings and give customers another reason to remain Prime subscribers.


Consequently, Amazon has high growth expectations for the coming months. The acquisition will allow Amazon to strengthen its position in the sector, now very crowded and concentrated, with coverage of potential clients and trying to unlock new market segments, incorporating, for example, older MGM films for new consumers. Hence, drawing on MGM’s legendary cinematic history. This is important because the long-term value of media companies is evaluated based on their ability to maintain a reliable flow of loyal subscribed customers.


In addition, it is worth mentioning that media holdings are not a core business for Amazon, so investors and stakeholders see the purchase as a new step in its diversification strategy, which is key to its success.


Long-term Upsides


In addition to MGM’s notable films and television content, the acquisition also gives Amazon a trove of intellectual property to produce remakes and spin-off series. For instance, Amazon is prepared to spend nearly $15.5 billion on entertainment content this year, while MGM Studios held $2 Billion in debt before its acquisition. This influx of cash will create ample opportunity to revive and remake content from old franchises. Notable series’ available to Amazon include Stargate, Tomb Raider, and Robocop.


Another avenue of expansion is the production staff and experience coming over from MGM Studios to Amazon. Amazon currently competes against other streaming platforms by offering a wide range of content. For example, Netflix, its largest competitor, has focused on maintaining its market share by producing and creating award-winning original shows and films on top of its show licenses. While Amazon has made its forays into original content such as Good Omens, its production capabilities will bolster from the technical experience MGM Studios brings.


It should be noted, however, that Amazon does not need to reinvent the wheel to profit off this purchase. Amazon’s largest purchase, its $13.7 billion takeover of Whole Foods was a step towards the grocery industry but did not necessarily lead to any major changes. Instead, Amazon’s long-term goal may be just to sustain its prime memberships, which in April exceeded 200 million worldwide.


Risks and Uncertainties

While Amazon does have a production team, taking ownership of a large studio like MGM may be too much for the technology giant. Over the past few decades, firms like AT&T, General Electric, and even Coca-Cola have acquired film studios to diversify into Hollywood. However, none of these firms has stakes today, with AT&T splitting off its $85 billion WarnerMedia acquired in 2018. Therefore, Amazon should take care not to make the same mistakes as its predecessors.


Another risk Amazon is making is that the shows, films, and intellectual properties from MGM Studios may take a while to access or use. MGM Studios have licensed many of its film series out to other streaming services. Such a tie-up led to MGM’s bankruptcy in 2010, five years after a coalition of firms bought the company.


Most notably, the James Bond series, which MGM has the rights to and is easily the most enticing brand in the acquisition, is partly owned by producers Michael Wilson and Barbara Broccoli. Such producers pose a potential opposition to Amazon’s plans of remaking films and releasing spin-offs of commercially successful shows.


One minor risk Amazon face is possible antitrust regulation from Capitol Hill. Many lawmakers in Congress, including Senators Amy Klobuchar (D-MN) and Josh Hawley (R-MO), expressed significant concerns about the firm’s monopoly extending to the media business. This is on top of recent lawsuits against Amazon for exploitative contracts with third-party sellers. With the increased scrutiny, Amazon may face some difficulty closing the transaction.


“I am very proud that MGM’s Lion, which has long evoked the Golden Age of Hollywood, will continue its storied history, and the idea born from the creation of United Artists lives on in a way the founders originally intended,” - Kevin Ulrich, Chairman of the Board of Directors (MGM Holdings)


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