Amazon & MGM – One last roar?

Amazon overpays for a jaded asset.

• Amazon is acquiring MGM Studios to bolster its digital ecosystem but while it has a great name and impressive catalogue, its distinct lack of recent franchises makes me wonder whether Amazon is overpaying in its haste to expand.
• Amazon is paying $8.45bn to acquire MGM from the creditors who brought it out of bankruptcy in 2010 following a large number of ownership changes over the last 30 years.
• MGM is one of the oldest and most famous of the Hollywood studios and owns a catalogue of some of the best-known films in history.
• However, Amazon should be paying for what the company will do in the future not what it has done in the past, and it is on this basis that the questions begin to arise.
• MGM biggest franchise is without doubt James Bond but this is owned jointly with the Broccoli family whose sign off is required for any new production to go ahead.
• The family remains dead set against any spin-offs such as a TV series (like Disney has done very successfully with Star Wars) meaning that Amazon will be at the mercy of the family’s whims when it comes to earning a return on the price it has paid for this franchise.
• Outside of this, the studio has had some recent success with hits like The Marvellous Mrs Maisel and The Handmaid’s Tale but there is nothing that even comes close to rivalling either Netflix or HBO.
• Apple was also in the running for this asset, but it looks like it was only prepared to offer around $6bn further increasing the probability that Amazon has overpaid.
• To earn a return on this asset, Amazon is going to have to come up with a new, blockbuster franchise that rivals either Game of Thrones for TV or James Bond for cinema.
• Its upcoming series based on Lord of The Rings is a strong contender, but this has nothing to do with MGM and so any success that it enjoys should really not be considered a benefit of this acquisition.
• The MGM catalogue will certainly deepen the content offering that Amazon has which will increase the appeal of both Amazon Prime and the content only subscription that the company offers.
• Strategically, there is no doubt that this acquisition makes sense as it is the ownership of content and hence control of where it is made available that defines which streaming service consumers will choose.
• Hence, no matter how well the acquisition goes, Amazon’s digital ecosystem will be strengthened by this acquisition providing support for both new user acquisition as well as pricing for its services.
• It may also encourage some users to become Prime members which is a very strong way to extend its dominance in e-commerce.
• Consequently, the only issue with this acquisition is the price and here I suspect that Amazon has paid substantially more than this asset is worth.
• Amazon currently has $72bn of cash on its balance sheet and so I suspect that its shareholders will forgive it should this turn to be merely a vanity project.
• That being said Amazon’s share price is likely to continue going sideways while its fundamentals grow into the valuation.
• However, if it has a bad quarter, the example of Twitter, Pinterest and its own history suggests that it would take a significant hit.
• Like many of its peers, the downside vs. upside risk looks skewed to the downside over the next 12-24 months meaning that this remains an unattractive place to invest.