MGM Makes Its Own Unexpected Journey

The Hobbit could put the studio on the fast track to an IPO | “I’m not going to bet against Peter Jackson”

Michael White

Bilbo Baggins, the hobbit enlisted to free a dwarf kingdom seized by a dragon, has two other tasks on his to-do list: Help restore Metro-Goldwyn-Mayer’s luster, and strengthen Time Warner’s franchise lineup now that Harry Potter and Christopher Nolan’s Batman have taken their final bows.

Advance sales and social media chatter for The Hobbit: An Unexpected Journey suggest the studios will get what they want (page 86). Co-produced by MGM and Warner Bros.’ New Line Cinema, the film is forecast to generate at least $300 million in North American theaters after its Dec. 14 release, according to Exhibitor Relations analyst Jeff Bock. The first Lord of the Rings movie took in $313 million. The Hobbit could draw more if Oscar-winning director Peter Jackson, who is bringing J.R.R. Tolkien back to theaters after almost a decade, can attract an audience beyond hard-core Rings fans. Sales for the subsequent Hobbit films will likely increase, Bock says. “Three-hundred million dollars is the low end. It’s possible people are really attracted to the 3D, and that might boost grosses, so the financial curve is there. I’m not going to bet against Peter Jackson.”

A successful Hobbit could bolster the prospects of MGM Holdings, which last year said it was exploring going public. Chief Executive Officer Gary Barber is rebuilding the studio, which went bankrupt in 2010, around plans for three Hobbit movies and the James Bond series. The latest Bond picture, Skyfall, has generated almost $870 million at the box office worldwide for MGM and distributor Sony Pictures Entertainment.

Not all of MGM’s investors — which include Highland Capital Management, Solus Alternative Asset Management, and Anchorage Capital Group — opted to go on this latest adventure. MGM bought back billionaire Carl Icahn’s 25 percent stake in July for $590 million, a sum that values the company at $2.36 billion. A sale or initial public offering that fetches a higher valuation for the studio would vindicate that move. Barber won’t discuss the prospect of an IPO.

MGM studio, maker of Gone With the Wind and The Wizard of Oz, has had a tumultuous recent history. Its finances have often been shaky, and its ownership has changed at least eight times since 1969, including three stints with billionaire investor Kirk Kerkorian at the helm. Barber says that when the company emerged from a two-month streamlined bankruptcy in 2010, “the highest priority from a revenue-generating perspective was to get these two franchises [The Hobbit and James Bond] going.” Now he’s planning remakes of RoboCop and the 1976 horror classic Carrie.

For Warner Bros., being MGM’s partner on The Hobbit represents a chance to replenish its lineup of so-called tentpole movies — films which lend themselves to sequels or spin-offs. Warner Bros. led the U.S. box office from 2007 to 2010, but slipped to second last year and is third so far in 2012, behind Sony and Walt Disney. In addition to The Hobbit, Warner Bros. is mining its DC Comics library to revive the Superman series and bring together several DC superheroes in 2015 for a joint adventure in Justice League, as Disney did last spring with the hit Marvel’s the Avengers.

Researcher Bock based his Hobbit box office forecast on early reviews that indicate the slower pace of the new film may prevent the movie from attracting a broader audience. Of 23 reviews compiled so far on Rotten Tomatoes, 18 are positive.

The Hobbit also poses a test for Hollywood’s new, faster projection technology, championed by Jackson as a way to add clarity, depth, and smoothness to 3D films, especially during action sequences. The technology, which involves projecting images onto the screen at a rate of 48 frames per second, double the industry standard, hit a glitch when a preview of unfinished scenes of The Hobbit at the CinemaCon industry convention in April drew unflattering press about the look of the format.

Studio executives say the kinks have since been worked out. Still, New Line is limiting the so-called high-frame-rate projection to about 450 of the 4,000 theaters in the U.S. and Canada that will carry the movie. “We wanted to get a good footprint out there, and at the same time we recognized that it was going to be a new format and we wanted to make sure everything was going to work properly,” explains Darcy Antonellis, Warner’s president of technical operations.

Cinemark Holdings, the third-largest U.S. theater chain, is capable of showing high-frequency 3D in all of its 461 locations but was allotted the new version in only 160, says CEO Tim Warner. While he would like to show the film on more screens, he understands New Line’s go-slow approach. “It’s a test of the audience,” Warner says.

The bottom line MGM, which paid Carl Icahn $590 million last spring for his 25 percent stake, could use a big box office for The Hobbit to justify the deal.


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