Auction alone is unlikely to resolve MGM's woes

The first round of bids for Metro-Goldwyn-Mayer turned out a shade better than expected, but the offers aren't close to covering the $3.7 billion that is owed to lenders -- reports The Wall Street Journal.

Bids ranged between $1.5 billion and $2.5 billion, according to people with knowledge of the situation, and MGM has begun to explore how it could stage a streamlined "prepackaged" bankruptcy as part of the auction.

In all, MGM received interest from more than 10 suitors. Some made actual bids while others expressed interest but haven't submitted offers.

MGM's current list of suitors includes Time Warner Inc.; Lions Gate Entertainment; Summit Entertainment; Liberty Media Corp.; News Corp., owner of The Wall Street Journal; and India's Reliance ADA Group, the people said. Others signaling interest included private-investment firms Elliott Management and Access Industries, the investment arm of Russian-born industrialist Len Blavatnik.

The studio is owned by a group including private-equity firms Providence Equity Partners and TPG Inc. and media companies Sony Corp. and Comcast Corp., which acquired the studio in a $5 billion deal that closed in 2005.

MGM declined to comment.

Under almost any sale scenario, MGM will need approval from all its lenders, a threshold that could prove difficult to achieve. The studio's lending group, led by J.P. Morgan Chase & Co., includes some 140 investors, many of them hedge funds.

MGM has tapped the restructuring practice at law firm Skadden, Arps, Slate, Meagher & Flom to prepare a possible prepackaged bankruptcy that would solicit approval from creditors ahead of a filing in hopes of limiting the studio's stay in court. In bankruptcy, MGM could force dissident creditors to do a deal as long as a certain number of other lenders agree.

"Getting 140 people to say yes to anything isn't easy," said a person familiar with the situation. The person said any bankruptcy filing would be a "quick in and out process" but cautioned that MGM was "far away from deciding [bankruptcy is] the way it has to go."

A person close to the negotiations says the studio remains operational with several films in the pipeline, including "Hot Tub Time Machine," which hits theaters in March and "Zookeeper," currently in post-production.

MGM, which owns a 4,000-title movie library including the James Bond and Pink Panther franchises, has begun evaluating the bids and could start providing more information to serious contenders in the near future, people familiar with the matter said.

The studio is struggling after taking on debt to pay for its 2005 leveraged buyout and a sharp slowdown in the market for DVDs with little hope of a rebound. On Wednesday, movie-rental chain Blockbuster Inc. said its earnings would be lower than expected after weak holiday sales.

Among the suitors, Elliott Management gained recognition over the summer when it led a group of lenders that took control of auto-parts maker Delphi Corp. out of bankruptcy. A person familiar with the situation said Elliott made "an indication of interest" to MGM in an effort to access more financial and operational details that would allow the firm to decide whether to make a serious bid.

Access Industries, which last year acquired the U.K. operations of Mel Gibson's Icon film and entertainment business, expressed interest in MGM, said a person familiar with the matter. An Access spokesman declined to comment.

Time Warner, which owns the Warner Bros. movie studio, put in a bid for MGM valued at less than $2 billion, according to a person familiar with the matter. A separate person familiar with the matter said Reliance has signaled its interest to MGM but hadn't yet made a bid. This person said any bid by Reliance would be well below $2 billion.

News Corp., which owns 20th Century Fox, is mulling whether to bid for MGM, said a person familiar with the matter. The company signed a confidentiality agreement to gain access to MGM's financial statements after fighting what it viewed as restrictive measures in the document, this person said.

Summit Entertainment hasn't yet made a bid, a person familiar with the matter said. Summit plans to partner with private-equity firm Cerberus Capital Management LP. if it pursues MGM, two people familiar with the matter said.

A Cerberus spokesman declined to comment.

Lions Gate submitted a bid late last week, said a person familiar with the situation. The bid was around $1.5 billion.

Liberty didn't immediately respond to a request for comment.

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