Sagging sales may drive down MGM bids

13-Mar-2010 • Bond News

MGM has a March 19 deadline for solicitation of bids for the Lion and its 4,000-title film library, but the latest round of due diligence is tugging down estimates of the studio's worth. Six companies were invited to make firm offers after a previous nonbinding round of bids failed to top $2 billion, says the Hollywood Reporter.

One big problem: Annual revenue from exploiting catalog titles for global television once exceeded $500 million but has fallen to $350 million. That's got some predicting perceived front-runner Time Warner will bid much closer to $1 billion than the minimum $1.7 billion likely needed to persuade holders of $3.7 billion in MGM debt to sign off on a sale.

If bids come in too low, the Century City studio would have to ask lenders for a fourth extension of the deadline for a big interest payment. The current debt forbearance agreement ends March 31.

MGM also would have to seek an extension of the April 8 deadline on a $250 million principal payment that comes due once its revolving credit facility expires.

If lenders balk at either extension -- and their mood grows surlier by the day -- the only place the Moelis-led effort to bail out MGM's owners will be headed is to bankruptcy court. Then it would be only a matter of time before the, uh, lion's share of studio equity passes from the current consortium to lenders.

A proposed outright sale would have to approved by lenders unanimously; a prepackaged bankruptcy would need two-thirds approval. MGM's debt had been held among more than 140 lenders, though recent consolidation of their ranks has lowered the number a bit.

MGM's owners include Providence Equity, TPG Capital, Sony, Comcast, DLJ Merchant and Quadrangle. Those invited to a second round of bidding include Time Warner, Lionsgate, Liberty Media, Summit Entertainment, Access Industries and Elliott Management.

MGM chief Stephen Cooper, brought in to replace former CEO Harry Sloan, is a turnaround specialist whose preference all along has been a debt restructuring rather than an outright sale of the studio. A prepackaged bankruptcy would amount to a restructuring, but there is the related question of studio management.

Cooper, who draws a six-figure monthly paycheck, could be replaced if the restructuring comes with a cash infusion by a new equity partner. That's most likely if the capital comes from an investor with a seasoned film team.

Lionsgate, Access, Spyglass and Qualia are among companies that could be tapped for more limited MGM investments, if bidding for the entire studio comes up short. Access, a diversified conglomerate controlled by industrialist Len Blavatnik, might be the bidder most likely to keep current management.

MGM's valuation problem stems from its aging library. The studio hasn't had a release in months, though it's set to unspool "Hot Tub Time Machine" on March 26.

Current owners mothballed production until a couple of years ago, so the studio's DVD revenue has been declining. More recently, the dust on the catalog has begun to undermine MGM's once-robust international TV licensing biz.