When Turner was right

Celebrating the twentieth anniversary of the Turner Classic Movies cable channel earlier this week, I noted that I was a little vague on how Ted Turner came to own the rights to nearly every worthwhile movie ever made. A reader wrote to offer a look back at the ancient history that provides the answer:

Back in 1985 I was working as a senior consultant for the entertainment division of a large, prominent accounting firm in Los Angeles. This firm happened to be the auditing and tax firm engaged by Turner Broadcasting System. Ted Turner had just completed a complex stock purchase and merger agreement to acquire MGM/UA Entertainment Co. from Kirk Kerkorian in which Turner paid about $1.5 billion but simultaneously got back $470 million by selling the United Artists subsidiary back to Kerkorian.

Turner was being widely mocked in the Hollywood party circuit for being played for a sucker by Kerkorian. The press was also reporting that Turner had paid a sum far in excess of MGM’s business worth and would have trouble financing the deal – he needed to raise about $1 billion. The difficult financing and subsequent poor performance of MGM’s new film releases slowed down the completion of the deal for several months. Ultimately, Turner’s dream of owning a film studio fell through and he ended selling off most of MGM’s assets (including the venerable MGM studio lot in Culver City) back to Kerkorian (and other entities) for about $300 million.

However, Ted Turner had confided to his accounting and tax advisors that what he really wanted out of the deal was the film library which consisted of the MGM classics such as The Wizard of Oz and Gone with the Wind (Ted’s two favorite movies) and also the good parts of the Warner Brothers and RKO libraries as well.

Turner went to great lengths to preserve his ownership of the film library. In order to complete the transaction and take advantage of certain tax benefits (the tax accounting part of the transaction was complex and way over my head), he engaged his accounting firm to conduct a valuation of the film library. I was assigned to the project because of my particular expertise in designing and programming computer software for entertainment asset valuation.

I worked closely with the accountants to ensure that all possible revenue streams including foreign, domestic, TV syndication, new media (videocassettes, pay cable, etc.) were assessed and calculated by the software. The program ended up being extremely complex and, because it was valuing over 2,000 films, it strained the computer resources available at that time.

I remember working all night to deliver the final valuation number (and about 2,000 pages of worksheet calculations as backup). The number for the entire library, as I recall, was around $90 million (Net Present Value) which was a lot of money in 1986, but far lower than Turner had effectively paid for the rights.

Since I was just a young tech guy, I wasn’t in the meeting in the board room when the accounting firm partners delivered the news to Ted Turner. I was waiting in the adjacent room and I could hear through the walls Turner screaming his objections. He called the partners “bean counters” with no imagination and concept of entertainment. He said something like, “You have no idea what these films are worth, they’re priceless. I am creating new channels and new technologies to exploit these films. This library is easily worth over a $1 billion.”

After the meeting was over, the partners asked me to make some adjustments to the software to account for new distribution and technologies. I remember them telling me to create a “colorization” parameter and apply it to certain classic films in the library. I asked what this was and they told me that Turner has the crazy idea to use new computer software to turn black and white films into color films.

The tweaks to the various parameters added a few million dollars to the value of the library which I was told by the partners would not satisfy Turner. He was not only concerned about the tax consequences of the lower valuation, but also of his image as a mogul – i.e., reinforcing the impression that he was taken advantage of by Kerkorian. Ultimately, the conservative accounting firm could not risk its business reputation by increasing the valuation to match Ted Turner’s grand vision.

As the years went by, I watched (and often was involved in the valuations) as Turner launched TNT and TMC to exploit the library. He also purchased Hanna-Barbera, which allowed him to launch the Cartoon Channel.

Ted Turner got in over his head in the mega corporate entertainment world and ultimately had to sell out to Time Warner. I never liked his left wing politics and he fell short as a solid business leader, but Ted Turner definitely understood the value of entertainment content and was brilliant in finding new ways to exploit it. Bottom line: His acquisition of the “rights to just about every worthwhile movie ever made” was a deliberate and savvy business strategy that paid off. In the end, the MGM film library really was worth over a $1 billion.

STEVE adds: I got to meet Ted Turner once, at his enormous Montana buffalo ranch, which is an interesting story all by itself.  I wrote up the encounter on the old NoLeftTurns site in 2005, and it is still archived here.  Of course he is a barking loon politically, but he’s also funny as hell, and can be charming after a fashion even with his political opposites.  Here and there it was possible to appreciate his business genius, including what a total disaster the AOL-Time Warner merger was, as it cost him much of the equity value of his fortune.

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