Business

Hedge funds lusting to cash out of MGM

The hedge funds benefiting from the turnaround at Metro-Goldwyn-Mayer still like the movie business, but an increasing number of them like the idea of cashing out even more.

“We are definitely in the seventh inning of this investment,” says Steven Azarbad, the Chief Investment Officer at New York-based Maglan Capital. “I and many others would really like a transaction.”

Odds are they’ll get it — and soon.

For one thing, interest in content of the sort created and stockpiled by the legendary studio has never been greater.

Upstarts like Netflix and Amazon raised demand for movies and TV shows several notches when their video streaming services took off a few years ago.

Now, even newer entrants like AT&T and Verizon want to outdo those so-called over-the-top players. Their plan is to keep their customer bases in place by turning their mobile devices into miniature TVs.

We are definitely in the seventh inning of this investment. I and many others would really like a transaction.

 - Steven Azarbad, Chief Investment Officer at New York-based Maglan Capital

“These mobile guys are ready to pay,” says Robert Routh, a senior media analyst at National Alliance. “They want to stream premium TV directly to their customers’ smartphones and skip the OTT option altogether.”

Then, too, there’s the never-ending desire of one content player to devour another.

As MGM investor Azarbad puts it, “Fox’s unsuccessful bid for Time Warner really fortified the notion that content is king.”

And when it comes to content, Azarbad and his fellow investors know better than anyone that MGM has a vault crammed with 4,000 feature films, including 175 Academy Award winners, and a library packed with 10,500 TV episodes.

That makes for an enticing product — not to mention good timing — should the studio decide to sell. Making both better, though, is the composition of MGM’s investors.

“They’re mostly vulture funds,” says a former studio chief practiced at dealing with them. “They naturally want in and out fast.”

Most of MGM’s equity holders were, in fact, debt holders before the studio emerged from bankruptcy in 2010.

That’s when their debt converted to stock worth, initially, $20 per share.

Azarbad built his pre-bankruptcy stake by buying MGM bonds at 38 cents on the dollar. Their subsequent conversion to equity made him a 1 percent owner of the studio, dubbed “the Lion.”

That stock today is worth $78 per share. And Azarbad says it has performed so well he has been forced to sell off pieces on the so-called gray market to keep Maglan Capital’s portfolio sufficiently diversified.

He knows it’s a swell problem to have and thanks an MGM team led by Gary Barber for transforming the once lame Lion into a studio expected to generate $350 million in free cash flow this year.

But if MGM’s roaring success poses problems for Azarbad, with just 1 percent, imagine what it’s doing for Anchorage Capital Group, with an estimated 30 percent.

“MGM is a pure-play and unaffiliated content company with an unrivaled film and TV library that is well positioned to grow globally,” Anchorage chief Kevin Ulrich told the Wall Street Journal.

Azarbad admits he found the statement extremely intriguing: “That was a for-sale sign if ever I’ve seen one.”