Time Warner ahead of Sony in MGM talks

Merger talks between Metro-Goldwyn-Mayer and investors led by Sony Corp are plodding along, but Time Warner Inc. is gaining an edge in launching a rival bid for the Hollywood studio, sources close to the talks said on Tuesday.

Los Angeles-based MGM, the film and television studio behind the James Bond movies, is set to report quarterly earnings on Thursday, but these sources said the company will not likely discuss the dealmaking, reports Reuters.

"Time Warner has caught up and gone beyond Sony in terms of due diligence," said one source with knowledge of the talks.

A second source said Time Warner is "very interested, but at the right price" and that any possible formal offer "is several weeks away."

Reports of the talks over a $5 billion deal between MGM and the Sony group first surfaced in April. Since then, Sony and partners Providence Equity Partners, Texas Pacific Group and Credit Suisse First Boston have run into roadblocks over various issues, including how much money each party would sink into the transaction and the buyout shops' exit strategies, sources have said.

Sony is still very much interested in the assets and continues to work toward making a formal offer for MGM. But the parties in Sony's group have dueling interests to an extent, as is often the case when public companies try to strike alliances with leveraged buyout investors.

Private equity funds generally look to improve and then exit their investments after a handful of years, while the corporate view on acquisitions is usually longer-term.

Sony's chief executive earlier this month cited "some complications" with the talks, and said the ball was in MGM's court. Sony had secured an exclusive negotiating period with MGM back in May, but that window closed weeks later without the announcement of a deal.

"The concern is they (the equity partners) are the ones putting up the money, but they don't have the control," said David Miller, financial analyst at Sanders Morris Harris.

Progress with Time Warner has been swift in recent weeks. While the mammoth media conglomerate may need more time to run diligence on MGM's financials, the sources said a possible takeover structure using cash and stock has been discussed.

MGM's public shareholders could receive as much as $13 per share for the Hollywood studio, while billionaire investor Kirk Kerkorian, who owns 74 percent of MGM, could see up to $11.50 a share with at least part of that in Time Warner stock, a source near the talks said. Time Warner would assume about $2 billion in MGM's debt.
Time Warner would be offering less than the $5 billion the Sony consortium has considered. But sources have said a lower valuation of MGM's complicated assets may be more realistic, and that Kerkorian might accept a discount because he would receive better tax treatment -- and perhaps additional returns -- if his windfall is in stock instead of cash.

MGM's formidable library of more than 4,000 films is its prize asset, and it would be a lucrative source of cash flow in the booming DVD market for either the Sony group or Time Warner.

General Electric's NBC Universal media business informally kicked MGM's tires earlier in the year, sources said, but its executives have balked at the $5 billion pricetag.

Thanks to `Goldeneye` for the alert.

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