May 26, 2021

Breakingviews: Amazon pays to take MGM chess piece off the board

by Breakingviews.

Amazon.com would combine a few moves in its potential $9 billion MGM Holdings deal. Jeff Bezos’s firm may pay a huge premium for the co-owner of the James Bond franchise, despite the risk that it could get caught in regulatory purgatory. But even if a deal isn’t approved, it would take a coveted asset off the streaming market for a while, giving the $1.6 trillion e-commerce giant a chance to catch up to media rivals.

In a deal that could be announced as soon as Tuesday, according to media reports, Amazon would pay almost two-thirds more than where the privately-traded MGM was valued in December, according to the Wall Street Journal. Amazon’s deal would amount to about 37 times MGM’s 2021 estimated EBITDA, taken by annualizing the company’s disclosed first-quarter figure. That’s almost triple the enterprise value-to-EBITDA multiple that Discovery’s deal implied for AT&T’s content assets, announced last week.

In some ways, Amazon could justify the splurge. Bezos’s company spent $11 billion in 2020 on streaming content, a more than 40% jump from 2019. MGM’s catalog of films, with about 4,000 titles, would boost its library by about 17%.

Yet the company would face a tough antitrust review. While watchdogs easily cleared Amazon’s last big deal, its $13.7 billion purchase of Whole Foods Market in 2017, Washington has changed since then. D.C. Attorney General Karl Racine said on Tuesday he’s suing Amazon, accusing it of unfairly raising prices for consumers. Bezos was among the big technology bosses called to Congress last year while regulators are reviewing anti-competitive practices.

If Amazon ends up wrangling with regulators for months or longer about MGM, other deep-pocketed competitors like Netflix and Apple would have to stay at bay. In the meantime, it’s possible that MGM’s valuation catches up to the price that Amazon may pay. The global video-streaming market is expected to more than quadruple from 2020 to 2028, hitting $224 billion, according to Grand View Research.

Plus it would give Amazon a chance to start to nip at Netflix’s heels. More than 175 million Prime members watched movies and TV shows in the past year, compared to more than 207 million subscribers for Netflix, which also spent about $11 billion for programming. Whether Amazon ends up adding MGM’s content to its offerings, an attempted tie-up with the studio would at least take one chess piece off the board.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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