MGM bankruptcy: inside the courtroom drama

MGM Studios’ dramatic restructuring is nearly done, with the “Lion,” as the company is known in Hollywood, finally in bankruptcy court. Today, Jay Goffman, a restructuring guru representing MGM, stood before a judge to deliver the epilogue sprinkled with the kind of drama (and a little comic relief) usually poured into a silver screen blockbuster, reports the Wall Street Journal.

MGM’s restructuring culminated in a “prepackaged” bankruptcy approved by nearly all creditors in advance. Companies need creditors holding roughly two-thirds of the studio’s debt and more than half of individual debt holders to vote in favor of a reorganization plan to get it blessed by a judge.

By last Friday evening, MGM had about 80% on both scores, Goffman said today. After placating activist investor and MGM creditor Carl Icahn, the studio had approval from nearly all creditors. Including accrued interest, lenders are forgiving about $5 billion in debt in exchange for ownership stakes in the studio, said Goffman, from law firm Skadden, Arps, Slate, Meagher & Flom.

Goffman began with fawning praise for all who worked on MGM’s restructuring. “Like any great drama, there are lots of other players,” he said. He introduced at least a dozen lawyers, bankers and other restructuring types in a style typically reserved for the Yankees opening day lineup. “I’ve never had a restructuring where people worked better together, more cohesively,” Goffman intoned.

Goffman saved his most detailed praise for Stephen Cooper, the turnaround specialist who served as a top MGM executive the past year-and-a-half. Goffman told Judge Stuart Bernstein that Cooper had worked on Enron, LyondellBasell and Krispy Kreme before the judge interjected.

“Before, or after they went into bankruptcy?” the judge asked, to courtroom laughter.

“After,” Goffman said, clarifying that Cooper typically oversees companies going through restructurings as opposed to being the executive at the helm as the firm deteriorates.

With that, Goffman launched into the narrative of what beset MGM. We’ve detailed most of MGM’s travails in the pages of the WSJ. But Goffman added some color to the negotiations to save the storied studio—“maybe the most iconic in history,” Goffman said, noting its more than 200 Academy Awards and rights to the “James Bond” film series. “There’s been a lot of intriguing drama over the past few weeks.”

Most know MGM’s 2005 leveraged buyout went sour and the studio couldn’t repay debt amid plunging DVD sales, nor make enough new hits to make those older films more attractive to customers. At the time of the LBO “everyone had high hopes for the future,” Goffman said. But – cue dramatic music – the DVD market tanked. (Lightning, cue strings) The recession hit. And the movies sometimes stunk. “We didn’t have great luck with certain motion picture releases,” Goffman admitted. (Please see: Time Machine, Hot Tub.)

An attempt to sell the studio flopped. So we’ll skip to the late-stage drama between MGM, Lions Gate and Icahn, as relayed by Goffman, who noted to the judge that much of MGM’s troubles had been covered “in the newspapers.”

MGM over the summer settled on Spyglass founders Gary Barber and Roger Birnbaum to take over management of the studio and merge some older films with MGM’s library. Lions Gate made a merger proposal, but Icahn, Lions Gate’s largest shareholder, had publicly denounced the idea of such a merger and said he would litigate such a deal. He was also suing Lions Gate execs in the meantime. For those reasons, Goffman said, MGM’s most influential creditors—including J.P. Morgan, and hedge funds Anchorage and Highland—stayed away from a Lions Gate deal.

Fast forward to the fall. Lions Gate again made an offer to merge with MGM. But MGM asked the rival to provide assurance in writing that Icahn would support such a deal. “They were not able to do that, so those discussions did not proceed,” Goffman said.

But Icahn was plotting behind the scenes and soon relayed that he held more than $400 million of MGM’s debt and wanted the studio to scrap its plans with Spyglass for the very Lions Gate merger he had once denounced. MGM’s creditors balked and Icahn proceeded to make several offers to buy out other creditors to block the Spyglass plan. “He’s not a man easily deterred,” Goffman said.

But the offers didn’t gain traction. “I’m happy to tell you, Your Honor, all of those failed,” Goffman said. Icahn remained essentially the only holdout and MGM had the votes to go ahead with its prepackaged bankruptcy. Still, Goffman wanted to bring “a fully consensual plan” before Judge Bernstein. So MGM’s creditors and others negotiated with Icahn and made some tweaks to the deal, which we’ve detailed before.

With the changes, Icahn agreed to vote for the plan, meaning just about every creditor was on board. “Fortunately for all of us, Mr. Icahn wasn’t successful,” Goffman said, referring to his attempts to scuttle MGM’s restructuring plans.

Goffman also said he was “eternally grateful” to Providence, TPG and other former MGM equity owners for agreeing to get wiped out and not putting up too much of a fuss. Goffman said he was “grateful” or “privileged” a lot –- words you don’t typically hear thrown around in bankruptcy.

The judge approved just about all of MGM’s routine first-day motions to keep paying employees and others. A hearing to confirm MGM’s reorganization plan and send it on the path to exit bankruptcy is scheduled for Dec. 2 — less than a month from now.

“This story couldn’t be more fitting for an Academy-Award winning picture,” Goffman told the judge.

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