Spyglass Entertainment nears deal to rescue MGM
10-Aug-2010 • Bond News
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MGM's creditors have hammered out financial details with Spyglass co-heads Gary Barber and Roger Birnbaum and the two sides have been negotiating the makeup of MGM's new board, they said.
Messrs. Barber and Birnbaum would run MGM as co-CEOS when the studio exits a streamlined bankruptcy later this year under the plan. A group of hedge funds that now control MGM's fate have identified the pair as their best choice for reversing the ailing studio's fortunes.
Under the plan, Spyglassâwhich co-financed recent releases including "Dinner for Schmucks" and "Invictus"â would merge older parts of its film library with the MGM library. The Spyglass founders would receive a 4% ownership stake in the reorganized MGM and creditors would forgive all of MGM's debt for the bulk of the restructured studio's new equity.
A deal could be done as soon as this week, the people said. MGM plans to peg the value of the reorganized company at $1.9 billion.
Once in bankruptcy, MGM could entertain other deals under an obligation to maximize its value for all creditors. MGM's creditors have left open pairing with other studio rivals, including Summit Entertainment and Lions Gate Entertainment Corp. Both have made recent overtures, the people said.
MGM, Summit and Lions Gate declined to comment. Spyglass couldn't be reached for comment.
A merger with Summit, the studio behind the profitable "Twilight" franchise, has appeal because the company is flush with cash and MGM needs funds for new movies. MGM's coming "Hobbit" films, prequels to the "Lord of the Rings" trilogy, are budgeted at more than $500 million combined.
Hedge-fund creditors also see promise in a deal with Lions Gate but are wary of potential complications from the studio's activist investor, Carl Icahn.
MGM's creditors would have to relinquish anywhere from a quarter to half of the new studio's equity in deals with Summit or Lions Gate. The hedge funds invested heavily in MGM's debt have resisted getting too diluted in any deal. Creditors holding two-thirds of MGM's debt must sign off on a deal for a bankruptcy judge to approve it. MGM hopes to limit its stay in bankruptcy court to about two months.Once exiting bankruptcy, MGM would try to raise a new credit line of about $400 million to $500 million to finance new movies.
Spyglass executives are negotiating a "break-up" fee should the creditors choose another partner, suggesting a deal is imminent.
MGM hopes to file the "prepackaged" bankruptcy sometime in mid-September, when its latest waiver on debt payments expires, the people said. J.P. Morgan Chase & Co., a major MGM creditor, is working on providing between $150 million and $200 million in debtor-in-possession financing to steer the studio through bankruptcy, one of these people said.
A Spyglass deal would end a year-long drama over MGM, well known for its roaring lion logo. The studio put itself up for sale last year but failed to garner bids high enough to placate creditors. Time Warner Inc. bid only about $1.5 billion.
Any deal wouldn't likely include MGM's top film executive, Mary Parent, a Hollywood veteran brought aboard in April 2008 to jumpstart the studio's production. She developed 20 high-profile film projects, including a remake of "Robocop" and a planned "Three Stooges" movie, but only four got made.
MGM's film library, which boasts the James Bond franchise, suffered big cash-flow declines amid the dearth in new films. Ms. Parent and other studio executives pushed a plan in which creditors would raise about $1 billion to bankroll new movies, an idea they dismissed.
A committee of MGM's most influential creditors met with Spyglass executives in New York in mid-July to hammer out deal terms, the people said. Talks intensified in recent days.
MGM's new board would have nine members, including Messrs. Barber and Birnbaum, one of the people said. The rest would include a mix of independents and hedge-fund representatives.
Messrs. Barber and Birnbaum of Spyglass would get a slice of MGM's new equity for combining a slate of older films such as "The Sixth Sense" and "Seabiscuit" with MGM's library. The parties agreed to value Spyglass's older films at about $80 million, the people said. Private-equity firm Cerberus Capital Management has a significant stake in Spyglass.
Over time, the Spyglass executives would be able to increase their MGM stake if the studio's performance improves or if the company is sold, the people said.
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