MGM Considers Special Dividend
Move Would Mean Windfall
Of $1 Billion to $1.6 Billion
For Investor Kirk Kerkorian

March 16, 2004

Billionaire investor Kirk Kerkorian would reap a windfall of between $1 billion and $1.6 billion if the film studio he controls, Metro-Goldwyn-Mayer Inc., issues a one-time special dividend of $6 to $9 a share that the company is currently considering.

MGM has been talking about ways to "share the wealth" with shareholders since last summer, when the company tried and failed to acquire Vivendi Universal SA's entertainment assets. MGM recently has eliminated all of its debt and increased its annual cash flow to nearly $200 million in 2003. The idea of a dividend was floated as a possibility when the company was in the early stages of considering its options.

In September, MGM Chairman and Chief Executive Alex Yemenidjian said that the management had at the time decided against recommending any kind of extraordinary dividend. Later, MGM bought back about 10 million shares, at about $17 a share, through a Dutch auction that was completed earlier this year.

Late Monday, however, MGM disclosed that it is contemplating a "significant" one-time dividend payment, which people familiar with the matter put at between $6 and $9 a share. "Our management remains committed to sharing the company's wealth with our shareholders," Mr. Yemenidjian said in a statement. He emphasized that neither the decision nor its possible timing was yet final.

Of course, while all shareholders would benefit equally on a per-share basis, the move would most clearly be a boon for the 86-year-old Mr. Kerkorian, who controls about 74% of the company's 235 million shares outstanding. MGM would borrow money at low interest rates to pay the possible dividend, which would probably be payable in about a month if the company decides to proceed. The borrowing would then be quickly repaid; MGM is expected to generate a total of $600 million to $900 million in cash flow over the four years from 2003 to 2006.

Mr. Kerkorian in recent years has at times seemed eager for a sale of MGM, and the company has in fact said numerous times that it was pursuing strategic alternatives. In 2001, the company held unsuccessful talks to merge with Sony Corp.'s Sony Pictures Entertainment. Later, the company approached possible partners including Walt Disney Co. and DreamWorks SKG. In 2003, Vivendi made an aggressive bid for the Vivendi Universal entertainment assets, such as Universal Pictures, but didn't prevail. As recently as late last year, MGM held preliminary talks with Time Warner Inc. that didn't pan out.

As a rule, it is assumed that Mr. Kerkorian has been seeking a stock transaction of some kind because of the preferable tax consequences. Yet even as he has failed to sell the company, Mr. Kerkorian has at times raised his stake in it. Harris Nesbitt Gerard analyst Jeffrey Logsdon estimates that Mr. Kerkorian has put about $3 billion into MGM over the years.

Now, the possible one-time dividend represents a way for Mr. Kerkorian to realize some return on his investment in MGM, the legendary studio that he purchased for the third time in 1996, at a low tax rate. The one-time dividend also wouldn't rule out the possibility of a sale. Once such a payout is made, MGM's stock would be expected to decline by about the same amount as the dividend, though going forward, it would have higher debt because of the proposed dividend plan.

Tax Consequences

The tax consequences of such a move for MGM shareholders are now more appealing than they once were. A 2003 tax-relief law cut the personal tax rate on corporate dividends from a maximum of 39.1% to 15%, inspiring a wave of companies to raise their dividends. A portion of MGM's dividend could be ruled tax-free if it is judged to be a "return of capital," owing to the fact that MGM has generated net losses instead of earnings in recent years.

MGM, with a 4,000-title film library, has generated greater operating cash flows recently as a result of several factors, one of which has been the explosion of DVD movie sales in the U.S. The company has also done a better job of managing its feature-film business, betting less on risky big-budget movies and more on modest titles such as "Legally Blonde" and "Barbershop," which can be enormously profitable if they become hits.

Write to Bruce Orwall at