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MGM Studios' creditors prepare to take control if bids fall short

09-Mar-2010 • Bond News

Metro-Goldwyn-Mayer Inc. is readying a backup plan should bids for the iconic film studio come in too low, said people familiar with the matter, reports the Wall Street Journal.

As talks continue--the March 19 deadline for binding offers looms--creditors are increasingly willing to assume control over the studio, these people said. Under that scenario, MGM would likely pursue a "standalone" plan in which lenders would convert their debt to equity.

The move highlights the brinksmanship now taking place between MGM's creditors and potential buyers of the Century City, Calif., studio.

MGM creditors are owed nearly $4 billion, and have for months tried to drum up interest in the 86-year-old studio, which went on the auction block in November. While MGM originally sought offers in the range of $2 billion or more, bidders are signaling they're willing to pay only around $1.5 billion, and possibly less, citing the sagging cash flow from the studio's film library, people familiar with the situation said.

MGM's bank debt currently trades around 60 cents, valuing the studio at roughly $2.4 billion —a sum at odds with some suitors' assessments. MGM's creditors have "gotten a little bit more brazen about hanging onto this thing if the M&A process doesn't provide the results that they like," said a person familiar with the situation.

If creditors opt for the standalone debt-to-equity conversion plan, the company would then sell stock to another investor, according to people familiar with the backup plan. That investor could come from among MGM's creditors, many of them hedge funds that have bought into the studio's bank debt and are more receptive to taking equity, they said.

Warner Brothers studio parent Time Warner Inc. and Russian-born industrialist Len Blavatnik, who owns Access Industries, are among MGM's leading suitors, said people familiar with the matter.

Other companies looking at MGM's books include Liberty Media Corp.; Lions Gate Entertainment Corp.; and New York hedge-fund Elliott Management, a big investor in Ryan Kavanaugh's Relativity Media.

News Corp. had offered to invest in MGM in exchange for an equity stake, but hasn't heard back from the studio, people familiar with the matter said. News Corp., which owns The Wall Street Journal, doesn't plan to buy MGM, they added.

Summit Entertainment has looked at MGM's books but it remained unclear whether they would bid. Qualia Capital, a media investment firm, has expressed interest in investing in MGM if the studio pursues a standalone restructuring.

MGM is working to get a deal done quickly ahead of payment dates on its debt. People familiar with the situation said that a final decision on MGM's fate is likely by April. A leniency agreement on MGM's debt expires March 31, and the studio faces a $250 million revolving credit facility maturing about a week later.

MGM declined to comment.

The studio discussed a standalone restructuring of the studio's debt with lenders in the fall but turned attention to trying to sell the company, a move creditors preferred given interest expressed by possible buyers.

While a household icon, with its roaring-lion calling card, MGM is struggling amid a big slowdown in the DVD market and the large amount of debt it took on after a leveraged buyout deal a few years ago. That deal turned the studio over to private-equity firms Providence Equity Partners and TPG Inc., as well as media companies Sony Corp. and Comcast Corp.

A sale or a debt-for-equity swap would almost certainly be done through a streamlined bankruptcy that lines up approval from many creditors in advance, according to people familiar with the matter.

MGM's lending group, led by J.P. Morgan Chase & Co., at one point included more than 100 investors, and any change in control outside of bankruptcy would require unanimous approval. Bankruptcy can force a deal on dissident creditors with a minimum support from other lenders.

MGM's most attractive asset is its extensive film library, which includes the James Bond and Pink Panther franchises among its more than 4,000 titles, many of them classics. The "Bond" franchise is especially attractive to other Hollywood studios, which are increasingly turning to recognizable brands to create blockbusters in a tough economic climate.

But MGM's lack of new films has hurt the library's performance. Studios typically package older films with new releases to pump up prices on licenses for television stations and other platforms. MGM released only one film last year, a remake of the 1980s musical "Fame" that performed poorly at the box office.

The dry pipeline contributed to a pronounced decline for MGM's library, with cash flow expected to drop to, at best, $318 million and more likely about $280 million in the current fiscal year, down from $450 million a year earlier, people familiar with the matter said.

That is prompting some bidders to signal they will pay between $1.4 billion and $1.7 billion for the studio, well below what creditors are owed.

Bids could even fall as low as $1 billion, some of these people said.

The library is "worthless without new product," said a person involved in the process, adding that the library's cash flows are "uninspiring."

MGM does have a new comedy, "Hot Tub Time Machine," coming out later this month and has partnered with New Line Cinema for two separate "Hobbit" movies, potential blockbuster prequels to "The Lord of the Rings" trilogy.

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