Where PE Went Wrong With MGM

If you can get past the annoying hedge fund mischaracterization, there are a few tidbits of useful info in this Defamer post about MGM. Author Edward Jay Epstein got his hands on the company’s sale memorandum and explains where its buyout barons (TPG, Providence Equity Partners, DLJ Merchant Banking Partners and Quadrangle Group) went wrong.

The main flaw in the LBO firms’ investment thesis, apparently, was its big bet on Blu-Ray. The firms took the gamble that DVD revenue would spike as people replaced their DVD players, and DVD collections, with high definition Blu-Ray players and collections.

That simply hasn’t happened, and MGM’s DVD revenues actually fell thanks to fewer new releases from the studio, a worldwide decrease in DVD sales, and “price erosion” caused by video piracy and services like Netflix and Redbox. In other words, TPG, Providence, and the others missed the macro-trend boat, big time.