Good morning allegedly squad, this is your friendly former senior financial analyst tom, currently a full-time youtuber, and in today's video we have to talk about mgm, actually getting acquired by amazon. Now, amazon, after spending a lot of money, a lot of time, a lot of resources trying to break into hollywood, finally decided to pay for one now they already spent 10 billion dollars on a single nfl game over the course of the next 10 years now, they're About to ink a 9 billion deal to buy mgm and in this video we're going to talk about why this deal is happening, basically, why amazon are buying, why mgm are selling and why it makes sense for both of them is the price actually fair, and would The regulators even allow this to happen because you have to remember: amazon have not been in the good place with the regulators, specifically with anti-trust issues. A lot to cover in this video stay with me. Don't click, nothing, don't smash, nothing don't buy nothing.

I don't have any courses any software, that any scanner can pretty much do i have nothing. The only thing i need is your attention in this video and i'm going to give you a professional level analysis. Much like i used to do for actual clients like amazon about this deal, we're going to dive deep into the numbers into the financials into the business analysis, and i'm going to give you a peek of how this due diligence would have looked like at a firm. Like scan arps or even pwc or kpmg, ey deloitte any of these firms that actually did this diligence are guessing months before this actually happened.

I'm going to give you a glimpse of how this would have looked like and, more importantly, i'm going to answer a simple question: are amazon overpaying at nine billion dollars? Because the answer is not that simple? My name is tom nash and i quit my corporate job as a senior financial analyst to break down companies for you there's one thing you need to know about me: i don't take from anybody. Oh, my goodness, it seems we have an interesting item to talk about today. Amazon are about to ink a 9 billion deal to acquire mgm studios, well, mgm holdings which actually hold mgm studios, but that's just a legal technicality, legal mumbo jumbo. Now in this video, i want to actually give you a glimpse of how an actual due diligence probably looked like for the months that led to this transaction, because this is what i used to do.

For a living. Clients like amazon and by the way amazon might have been my client at some point. I can't say yes or no, maybe i actually came up to us and said: hey we're actually interested in buying company xyz. Could you give us an actual answer about? How would you evaluate this company? Is it a good deal everything we need to know? Please let us know, and usually these types of due diligence would have been divided into two separate due diligence.

A legal due diligence, a firm like scavengarps or sullivan cromwell, like a top-tier law firm, would do the legal due diligence and they would look at the intellectual property issues. The lease agreements that they have, for example, like regular, legal and ip legal and on the financial side, it would be divided into accounting, financial and tax. Now, obviously, in this 10-minute video, we can't cover this five-tier financial. Due diligence look at this, and none of that we can actually give you a glimpse into the core stuff, the most interesting parts.

You know how in the movie, they don't show when people go to sleep or go to the toilet. So in this video i'm going to take you on the journey of how a real financial due diligence would have looked like if i split it up and just kept the most important parts. But of course we have to caveat this because an actual due diligence probably took months and involved a lot of people, tens, maybe hundreds of people. This is just kind of a glimpse of how it would taste like let's get started.

So what we're looking at here is a nine billion dollar deal potentially and if it actually carries out, it's gon na be the second biggest acquisition that amazon did after whole foods for 13 billion dollars. Now, in this new climate of amazon, actually pushing into entertainment and broadcast makes a lot of sense. I just said it in the opener: they spent 10 billion on one nfl game per week. For 10 years i mean in that kind of scope of prices, 9 billion.

Doesn't seem like a lot, and a lot of you would assume that this is just a cheap price for basically a company like ngm with all their assets, intellectual property, their physical assets hold on a second. Let's just look at the numbers here and let me show you the actual factuals now. First of all, let's talk about the motivation why amazon are buying mgm. Obviously, this deal is motivated by amazon prime they're trying to push amazon.

Prime amazon prime was already at 21 of the streaming market last year. This year they lost about five percent went down to 16. Now, that's not good. That's usually the equivalent of your wife telling you hey, you're, getting too fat you better get into shape.

That's the first phase before the second phase, which is basically having a baby that looks like your gardener. I mean you probably want to get into shape, so there's a warning sign here for amazon and now they're actually starting to address it, which is actually very smart. However, things are not exactly as bad as they seem because if you look over at the neighbor, where the gardener is working at the moment, they just lost 30 of their clients. So it's not an amazon problem.

It's a market problem. The thing is that the market is getting very crowded, very saturated, not to talk about destiny plus apple plus hulu. You have hbo max getting into it nbc universal, there's a lot of competitors that are getting into the streaming market becoming a lot more crowded than it was a year ago, so they're cannibalizing off each other, which is kind of normal. However, amazon are quite different from every single competitor in this category, which make a lot of sense for this specific deal.

Hang on i'm going to show you why, and you know i don't hold you hostage in this video, so i'm not going to keep the most interesting part to the end and not to say that this is the most interesting part, but this is actually very interesting. So you have to look beyond the numbers right. It would seem that amazon prime, are trying to grow so they're, buying mgm, but check this out. Amazon have one advantage that none of these other streamers actually have their client base, which is 54 million.

Users are one third of the entire client base of amazon time in general, not just prime videos, so unlike netflix and hulu and hbo max that have to spend billions of dollars on marketing to get clients through the door. Amazon have one in three clients, basically already in the service, but the other two clients are essentially sitting in the store just waiting for a better deal, so 54 million active users, 150 million of users of amazon prime subscribers, whatever you want to call them. The only thing amazon needs to do is just offer a better deal. These other two guys in the store for everyone that subscribe will also subscribe.

So amazon literally has to spend zero dollars on marketing and promotion and then can put that entire budget into creating better content right. But you can actually create better content by investing and actually creating it from scratch, or you can buy one, which is exactly what they're doing here. But in this video we got ta take a look at the price. Nine billion is a hefty price.

We have to look if it actually makes sense, but before we do, i have to warn you before you go and buy his stock of amazon, hoping that this deal will catapult the stock price up. I'm not sure this deal is actually going through. You have to understand that as far as anti-trust regulations, amazon is in the hot seat. I mean anti-trust for those of you who are not familiar with.

It is essentially the government authority that prevents monopolies and oligopolies from basically preventing them for actually doing, non-competitive stuff, essentially hiking the prices for you. Let me give you a prime example: let's say that you're a mom and pop shop right and walmart open up right next to you and all of a sudden. They sell all their products at like a buck, just to drive you out of business, and then they hike up the prices. So that would be an egregious violation of anti-trust laws, but that's just basically what antitrust is and amazon based on both their size and the multiple industries which they dominate now are already in the hot seat, because they're getting too big for their own good.

Now, if this was china, i'm assuming jeff bezos would have taken a nice vacation into a re-education camp, but this is america plus in america. The nhs authority is pretty much asleep at the wheel. They let the entire telecom market just consolidated to like three companies. However, there comes a point where you just push.

Somebody too much take a look at kwame bryant. For example, kwame brown took a lot of for 20 years until he finally erupted like a volcano at some point, the entertainer's authority is gon na, say: hey amazon. That's enough, so i'm not sure if this is the case, because there is a case to be made here that amazon are not the strongest player in video but hey they're, the second biggest streamer, as it is after netflix with 16. So you can't just say we're not really competitive by buying mgm, they kind of become the leaders or quasi leaders.

So there's a lot of arguments will be made here. However, you have to understand that amazon's lobby power has proven itself in the past with the hopeful zeal and a lot of others. So if i have to gamble based on my own opinion - which is this and by the way, everything i say in this video is just my own opinion - might be inaccurate, maybe just wrong or just ramblings of a madman. You got to do your own research, allegedly blah blah blah, but based on my own opinion, i don't think the anti-trust authority will disallow this to happen.

But again, let's see what happens, but now, let's go to the valuation. Let's see if the 9 billion valuation is fair, so, first of all, what are they buying here, as you can see on the screen? There's a lot of intellectual property, there's a lot of tv productions and a lot of movies and franchises like james bond, the rocky or even the pink panther. For those of you remember and by the way i hope they bring back stargate oh wow, i'm gon na subscribe to amazon if they do in any case, there's a lot of franchises a lot of ip, but also mgm actually has one more advantage that you cannot Discount, it's not like they're just buying a library. You have to understand that mgm is an actual studio.

They have a lease, they have property in that property. They have actual equipment and people who know how to make films. So if amazon wants their own studio here, you go so you're, not just getting the ip you getting all the expertise, the know-how, the employees, the facilities, the leases there. We have to take into account the premium that amazon wants to pay to actually get a studio.

Where they can produce their own movies and mgm has bonafide good facilities, and i think that's why. The main reason that this deal makes a lot of sense for amazon, not just the content, because, as you saw on the screen, the content is not amazing. I mean nothing to write home about they don't have the most amazing content, but with their facilities and their know-how and expertise and everything that actually will allow amazon to produce their own movies in california. That makes a lot of sense, but hey.

Let's look at the numbers, so let's look at the quarterlies first and by the way this is a private company. So the amount of information here is a little bit limited, but we work with that and that's good enough for us. As long as we have some financials, we will be fine, so what we have here is 284 million in actual cash, almost a billion in total current assets, 4.1 billion in total assets. You have to ignore this one 500 million.

That's an acquisition that they did. The goodwill, if you ignore that one you're talking about 3.6 billion in assets plus you have 2 billion of prepaid, i guess film and production cost that they've already prepaid, which will actually generate a lot of content. So you cannot discount that that actually has to stay in. So you talk about 3.6 billion in assets overall, not bad at all 10 about in cash, not brilliant, but not that bad.

Now, as far as liabilities go, we have 536 in current and total abilities of almost 3 billion 2.8 billion, so you have about 3.6 of actual assets if you utilize the goodwill and 2.8 of actual abilities. Now, here's the part that scares me the most the corporate debt part. This is the part where actually scares me: 1.98. 2 billion dollars of debt.

That's a lot of that because you have to service that debt and that would mess with your cash flow, as i'm sure we're about to see. Based on my experience. So this thing is a major red flag and i think that's one of the reasons they're selling, because this debt is like having a ball and chain on the neck, it's probably bearing them down. Let's take a look okay, so this is 2020.

They made 1.5 billion. Another 1.5 billion last year before that, so basically, before covert hit, they were pretty steady at 1.5 billion per year of revenue, not a lot of growth but extremely stable, and, as you can see right now, they took a little bit of a covert hit. This is q1 versus q1 last year, so they took from 403. It hit all the way to 350.

Nothing dramatic, they're, pretty much. Staying on course to be in that range of 1.3 to 1.5. They did take a little hit, but still right there in the same spot, not a lot of growth, but also nothing dramatic. The operating income actually is on the upside, as you can see, they improved from negative 500.

In 2020 they went to positive 120 million, which actually is a good sign and they also generated actual income before taxes 35 million. If you remember, i mentioned earlier, the two billion dollars debt. Well, as you can see here, this is the service of the debt. If i'm not mistaken and they're paying about four million a year this year and next year, however, look at this balloon payment.

That's coming up in 2023, 1.2 billion they have to pay in 2023, which is just around the corner. It's in a year and a half now they're making about 30 million cash flow a year and they have to pay 1.25 billion in this year alone, not to mention that if somehow they survive that in 2025 they have another lump sum payment of 375 million. So they're looking a lot of dead balloons right here that they cannot repay they're in deep. That's why they need to sell to somebody who has the cash to actually handle this because they're on borrowed time, and that's something you want here in mainstream media.

This is the real reason mgm is selling in my opinion. So let's look at the adjusted ebitda 300 million - actually an improvement from 200 in 2019, so there are about 300 million in general, adjusted ebitda, plus another 1.5 billion in revenue. The question is, how does it translate to the nine billion price tag that amazon is paying? Let me show you so. The first thing we have to talk about is how much they're selling for right now, based on their revenue, 1.5 billion they're selling at a multiple of six.

Now some expert will tell you. Well, 15 is the average? You know some people just sell this nonsense. The 11 foundations of successful investing and all that nonsense, and, of course i talked about how it has to be industry specific. So if you want to talk about industry, specific metrics, you have to look at competitors, so six based on some random 50 numbers seems like a great price.

But if you look at viacom they're at one discovery, 1.73 fox 1.8. So, based on that, we know that six is extremely expensive based on the telecom industry. Now, if fox were selling at this price, their price would go from 21 billion, which is what they have right now to 130 billion, because fox have 12 billion dollars in revenue and they're, currently valued at 21 billion. Now, on the other hand, you have mgm, with 1.5 billion versus the 12 and they're selling for nine, so based on that valuation fox would have to sell for 130 billion.

So this is a massive premium. You can't ignore that you have to understand that amazon are definitely overpaying here and it's not different. If you look at the ebitda multiples as well now their evo ebitda is 30. again.

30 is quite expensive, especially if you look at again viacom art, 8 discovery. 9. Fox at 8., based on this valuation fox, would have been at 90 billion. I guess it's an improvement, but it's not that great, so they're definitely overpaying.

Now, that's the easy part, any yahoo with some sort of a software, their peddling can tell you their overvalue. Now the question is by how much for that we have to run a dcf. This is kind of an improvised dcf with basic numbers in the reports you'll find that they really have no capex, so we absolutely put little numbers on capex and just ran a basic dcf based on the 10 discount 21 tax rate. This year, 28 tax going forward.

Assuming the biden thing goes through very basic, very raw, it's three and a half billion, because we also have to deduct this 1.7 billion of net debt cash minus the debt, so 3.5 billion based on the dcf valuation. Also, if you look at the enterprise value, which is basically the multiple, the 19 multiple on the ebitda, we're talking about a little bit better 5.3 billion. So so, basically, their evaluation is somewhere in that range 3.5 billion to 5.4 billion. Now the fact that amazon is paying 9 billion means that they're paying for a massive premium.

However, as i mentioned earlier, it makes a lot of sense because there's a lot of premiums and synergies here for amazon that don't make sense for pretty much anybody else. First of all, amazon can afford to overpay. They have the cash they have the assets, they don't need to get the best absolute deal, they need it more than they actually need the discount amazon they're sitting on 33 billion dollars of cash. It's not a huge deal, especially when they don't have to spend that money in marketing and promoting amazon, prime, because they have another 100 million clients sitting in their network waiting for a better deal to sign up.

The other thing is that amazon needs that location. They have a lease for the massive studio in california, where amazon can actually produce their own films, not to mention the fact that even in their mediocre content, in my opinion, there's some gems - i mean the james bond franchise, the rocky franchise. You can make a lot of tv content from that plus they do have revenue streams, they're getting revenue from shark tank and some other tv shows. So i mean it's not really a bad deal if it's amazon who are buying it for pretty much any other client.

I guess the answer would be it's not a great deal, but for amazon giving how short of a supply there is of actual content that comes with the studio with employees with the know-how. It's actually a deal. That makes a lot of sense. For somebody who is pretty much jeff bezos to overpay for a ferrari makes sense.

I guess, at the end of the day, for somebody like jeff bezos, to overpay to get mgm with their facilities their ip and the brand name that comes with it makes sense. But again my opinion might be inaccurate, might be wrong might be reminiscent of a madman. Thank you. I hope you enjoyed this comment below if anybody is here actually working in a major law firm or a big four.

That actually did these types of dilutions comment below and let people know if what i said is total or it's accurate. You know kind of test me on this challenge me hey and also, if you find some mistakes, let me know again i'll see you guys in the next video shout out to the patrons and the channel members. You guys are amazing. Thank you so much fist, fizzbump i'll, see you guys next video.