Kirk Kerkorian: The Lessons of Leverage (Part II)
"Kerkorian makes these huge, stupid deals, and he always comes out richer."
This is the second part of my piece on Kirk Kerkorian - part I.
Like his father, who had gone bust speculating on land in California in the 1920s, Kirk Kerkorian had scars to remind him of the dangers of leverage. Strapped for cash and haunted by European lenders, he was forced to sell his International Hotel, the biggest hotel in Las Vegas at the time, to the Hilton family. But what if he could use this experience to his advantage?
Kerkorian had taken over and merged two movie studios, MGM and United Artists. MGM was a shadow of its former self but owned an extensive library with a third of all movies made. And in the junk bond-fueled market of 1985, Kerkorian was ready to monetize this unique asset.
He had previously discussed a joint venture with Ted Turner, the upstart entrepreneur who had turned his father’s humble billboard company into Turner Broadcasting. Turner’s content licenses were expiring and the cost for quality programming was going to squeeze his margins. Kerkorian sensed an opportunity to get at a premium price for MGM.
He offered Turner the chance to buy MGM with a catch: Turner had to commit to the purchase within two weeks, long before the financing could be arranged. But Turner was eager to buy the library and trusted Drexel’s bond machine to work its magic.
Less than three months later, Kerkorian had Turner over a barrel. The debt load was too high. MGM’s new releases were flopping. Turner was already short on cash. Kerkorian had once been in the same seat, forced to sell by his lenders. What was he going to do with his newfound power? He liked to remind people that he left “meat on the bone” in the deal for everyone. Was that just a platitude?
Welcome back to one of my favorite rags to riches stories (part I). I was trying to find a structure in Kerkorian’s long and eventful life and came up with three stages: the upstart who parlayed a tiny nest egg to control major assets in Las Vegas and Hollywood. At this early stage, Kerkorian operated with little equity and borrowed heavily. Leverage was dangerous.
In the 1980s and 1990s, Kerkorian masterfully traded his assets, including casinos, studios, and took stakes in major companies like Chrysler. He mostly remained inside his circle of competence and was able to exploit the weakness of other players.
Finally, Kerkorian in his twilight:, unwilling to retire and still aiming for bigger wins. He kept betting on Vegas and casinos globally and ended up overleveraged and exposed when the financial crisis hit. Much of his fortune disappeared.