Low bids for MGM cloud fate of studio

12-Jan-2010 • Bond News

First-round bids are due by the end of the week in the auction of debt-laden film studio Metro-Goldwyn-Mayer, and nearly a dozen prominent Hollywood and media names have submitted offers, according to people familiar with the matter - reports the Wall Street Journal.

Among the companies making offers or weighing bids for the storied studio are Time Warner Inc.; Lions Gate Entertainment Corp.; News Corp., owner of The Wall Street Journal; Summit Entertainment; Liberty Media Corp.; CBS Corp.; AT&T Inc. and Indian conglomerate Reliance Industries Ltd., these people said. They said former News Corp. President Peter Chernin and former Yahoo Inc. Chairman and Chief Executive Terry Semel also have expressed interest.

The bids are in the $2 billion range, the people said, far below the $3.7 billion MGM owes its bank lenders. Some could come in below $1.5 billion, they said.

Representatives of the bidders declined to comment or couldn't be reached. An MGM spokeswoman declined to comment.

The low offers and MGM's complex capital structure could force the studio to seek protection from its creditors in bankruptcy court, and try to sell itself while in Chapter 11 proceedings, people familiar with the situation said.

MGM said in November it would seek a possible sale as it struggled with looming debt payments. The studio, which has enlisted turnaround specialist Stephen Cooper to help it restructure, faces debts of $3.7 billion stemming from a 2005 buyout and a $250 million revolving credit facility maturing in April.

The auction of MGM has limped along in part due to limited financial and operational disclosures from the studio, people involved in the process said. In particular, the potential bidders are eager to see more detail about the studio's distribution rights, known as "avails" in Hollywood parlance.

MGM is owned by a group including private-equity firms Providence Equity Partners and TPG Inc. and media companies Sony Corp. and Comcast Corp., which bought it for $2.85 billion and assumed $2 billion in debt as part of the deal.

MGM released just one film last year, a remake of the 1980s musical "Fame," which underperformed at the box office. The studio's most valuable asset is its film library, which includes some 4,000 titles, including the James Bond and Pink Panther franchises. MGM also owns a piece of the two "Hobbit" films to be produced by "Lord of the Rings" director Peter Jackson.

MGM's library generated more than $450 million in cash in 2008, from the sale of licenses for DVDs and TV deals, according to people familiar with the situation. But amid a decline in the home-video market, it now generates roughly $280 million a year in cash, these people said.

MGM faces key deadlines in coming months, including a forbearance agreement with lenders that expires Jan. 31 and a $250 million revolving line of credit that matures in early April. People familiar with the situation said the forbearance agreement should get a routine extension, and that the studio is expected to be restructured or sold before April.

While MGM will likely get many bids, it could still be forced into bankruptcy, said people close to MGM, its lenders, and potential buyers. Its lender group, led by J.P. Morgan Chase & Co., includes some 100 investors, many of them hedge funds.

It could prove difficult to get so many stakeholders to agree to a transaction. But in bankruptcy court, federal law allows companies to force dissident debt holders to go along with a deal so long as a certain number of other creditors agree.

If MGM decides not to pursue a sale, some other options remain on the table for the beleaguered studio, including a proposal from investment fund Qualia Capital, run by Amir Malin and Ken Schapiro, to restructure the company, convert its debt to equity, and infuse it with enough cash to keep it as a going concern and making movies.