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Spyglass Entertainment emerges as lead candidate to run MGM

21-Jun-2010 • Bond News

Spyglass Entertainment has emerged as the leading contender to run Metro-Goldwyn-Mayer Inc., said people familiar with the matter, as the beleaguered film studio races to restructure a roughly $4 billion debt load this summer - reports the Wall Street Journal.

Spyglass co-heads Gary Barber and Roger Birnbaum would run the studio as co-chief executives under a plan being discussed with MGM's creditors, these people said.

The talks are continuing, and no final decisions have been made, the people said. Summit Entertainment, the studio behind the "Twilight" vampire-film franchise, also has been in discussions with MGM and its creditors, and remains a candidate to run the company, they said.

MGM, Spyglass and Summit all declined to comment.

Summit, which releases 10 to 12 films on its own annually, submitted a plan to MGM and its creditors outlining how the companies could merge. A merger of the two studios could mean an initial public offering down the line, the people said.

But Spyglass, which co-financed the recent hits "Star Trek" and "G.I. Joe," is the preferred choice of a group of hedge funds holding large amounts of MGM's debt, the people said.

Any deal would be executed in a "prepackaged" bankruptcy, in which a company lines up approval from many creditors in advance, with an eye toward spending less than two months in court proceedings.

Under the restructuring plan, creditors would swap their debt for nearly all the equity in a restructured film studio. Spyglass executives would get a slice of that equity, though the details haven't yet been ironed out, the people said. Because it is a smaller company, creditors would hold more equity in a deal with Spyglass than Summit, they said.

Messrs. Barber and Birnbaum of Spyglass impressed MGM's hedge-fund creditors during a recent presentation on how they would manage the studio. Their proposals included making a mix of low-budget and high-priced films, people familiar with the matter said.

That contrasted with a plan from MGM that contemplated up to $1 billion in new money to bankroll a slate of expensive blockbuster-type films. MGM's creditors have been cool to putting large amounts of new money into the studio, though some fresh capital will be needed.

Spyglass, an investment holding of private-equity firm Cerberus Capital Management LP, has sent a proposal to MGM's most influential creditors. They include J.P. Morgan Chase & Co., Anchorage Advisors, Highland Capital Management and Davidson Kempner Capital Management.

The two sides are involved in negotiations over details of the plan, and are pushing to get a deal done before a waiver on MGM's debt expires in mid-July, the people said. But MGM could be forced to seek its sixth waiver from creditors since November, they said.

Having Spyglass take the reins would likely spur a reshuffling of MGM's top management ranks, including Mary Parent, the studio's top film executive. She shares a new "office of the CEO" with turnaround specialist Stephen Cooper, who was hired by MGM's owners in August to restructure the studio. Mr. Cooper is expected to move on once MGM's restructuring is completed.

The discussions about a new management team come after an auction in which MGM failed to attract bids high enough to make creditors eager to sell the studio. Most suitors walked away from the bidding, leaving only a $1.5 billion offer from Time Warner Inc. That bid would pay creditors far less than what they are owed.

MGM's most valuable asset is its library of more than 4,000 films, including the James Bond franchise. But the cash-strapped studio hasn't produced many new films lately, causing the film library's value to decline and discouraging robust bids. The library's cash flow recently fell to $318 million from $524 million in fiscal 2007.

The uncertainty around MGM's future has wreaked havoc on its production plans. The next Bond movie has been put on indefinite hold. The director of two coming "Hobbit" films—potential blockbuster prequels to the "Lord of the Rings" trilogy—just resigned, citing MGM's restructuring woes.

Many holders of MGM's debt sold their paper at around 60 cents on the dollar amid the low offers for the studio. Hedge funds including Anchorage, Highland and Davidson Kempner scooped up the paper, and are now part of small group that holds more than a third of MGM's bank debt, people familiar with the situation said.

In March, the hedge funds intensified negotiations with MGM's Mr. Cooper and Ms. Parent about a streamlined bankruptcy plan that would hand creditors control of MGM. The hedge funds then began a Hollywood tour, meeting with the likes of former Warner Brothers and Yahoo Inc. head Terry Semel and former News Corp. executive Peter Chernin.

Mr. Chernin made clear he had no interest in running the studio full time, people close to him said.

MGM's struggles stem from the large amount of debt it took on after a leveraged buyout deal a few years ago.

The 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.

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