September 17, 2004

Sony Beats Time Warner to Take Home MGM

MGM & SonyThe consortium led by Sony has reached a tentative agreement to buy Metro-Goldwyn-Mayer for about $4.8 billion in cash, snatching it from Time Warner’s clutches at the last moment. The past couple of years, MGM has been hunting for ways to get bigger having made an $11.5 billion all-cash bid for Vivendi Universal Entertainment last year, losing to NBC.

Time Warner had been seen as the front-runner to acquire MGM but Sony raised its offer, setting off a bidding war that Time Warner decided it didn’t want to participate in. "As we pledged to our shareholders, we approach every potential acquisition with strict financial discipline," said Time Warner chairman and CEO Dick Parsons. "Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity."

Sony is expected to shutter MGM's current production, with the likely exception of the "James Bond" franchises. Among MGM's upcoming films are a "Pink Panther" remake with Steve Martin, "Code 46" with Tim Robbins and "The Beauty Shop" with Queen Latifah. MGM has a considerable library of thousands of titles, including the "Rocky" franchise. Analysts have estimated MGM's library will generate $440 million in cash flow in 2004 by exploiting only 1,500, or about 36 percent, of its titles on the newer DVD format. Sony announced a future partnership with cable provider Comcast to establish a video-on-demand content channel with Sony Pictures content along with MGM content and Comcast is may become a minority equity investor in the acquisition. The deals, should they occur, would constitute a major consolidation of content production and distribution. Here's some detail:

    The deal, which ends an auction that was filled with behind-the-scenes machinations for months, included one last surprise twist: Comcast, the cable giant, joined Sony's consortium as a strategic partner and a possible investor.

    The Sony-led group, which includes the buyout firms Providence Equity Partners, Texas Pacific Group and DLJ Merchant Banking Partners, struck the deal with MGM on Monday, just 24 hours before the studio had scheduled a board meeting to approve a deal with Time Warner.

    If the transaction is completed, it would be the third time that Kirk Kerkorian, MGM's controlling shareholder, would have sold the company since he first acquired shares in it in 1969.

    The deal caps a come-from-behind story for Sony, which originally bid for MGM in April but was unable to complete the deal after becoming bogged down in negotiations with its backers, opening the field to a rival offer from Time Warner.

    With the last-minute addition of Comcast to the Sony-led consortium -- a pact that was negotiated over Labor Day weekend in Martha's Vineyard, where executives from Sony and the other investors converged on the summer house of Brian Roberts, Comcast's chairman -- the group decided to raise its bid to $12 per share from $11.23 and to sweeten its offer by offering a nonrefundable $150 million deposit. Time Warner had offered $11 per share and had guaranteed the deal's completion.

    The Sony-led group could justify the higher bid because part of its deal with Comcast calls for the creation of several new premium cable channels that will broadcast both Sony and MGM movies, adding revenue for the company.

    For Comcast, its participation came with some reluctance. Having lost its hostile bid for the Walt Disney Co. and been derided by investors for even making the offer, Roberts was wary about being part of another potentially unsuccessful bid for a content provider, executives close to the negotiations said. Indeed, he was so insistent about not being on the losing team that he signed onto the deal only as a programming and distribution partner. He indicated to the group that Comcast would become an investor only after the deal is completed. To keep Comcast's role in the deal secret, MGM and even bankers for the Sony-led group were kept in the dark until the very last moment.

    Time Warner pulled its offer off the table and decided against a higher bid when it learned early Monday that the Sony-led group appeared to be the winner.

    "Although MGM is a valuable asset, we have decided to withdraw our bid," Richard Parsons, Time Warner's chairman and chief executive, said in a statement. "Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity."

    While MGM may be famous for making films like "The Wizard of Oz," under the plan being developed by the Sony-led group, most of the movie studio operation would be shut down. Sony would license and distribute MGM's most valuable asset, its library of more than 4,000 films. Only the studio's best- known film series, like James Bond, would continue to be produced under the MGM brand through Sony.

    In recent years, Alex Yemenidjian, MGM's chief executive, turned the company around by focusing on its library while shrinking its studio business. As a result of those moves, the company produces an enormous amount of free cash flow compared with its rivals. The company forecasts $150 million to $200 million in free cash flow for 2004.

    The arrangement with the consortium was originally conceived and structured by Sony, which already owns the Columbia and TriStar studios, so that it could gain access to MGM's library without having to pay the entire bill and take on additional debt, a requirement of its Japanese parent. MGM's library of films will not only give Sony additional revenue from next- generation DVDs, but also give it added weight in the looming fight over technology standards for those DVDs.

    Despite nearly five months of back and forth inside the Sony-led group, the bid was kept alive by Jonathan Nelson, the co-founder of Providence Equity, and Robert Wiesenthal, Sony's executive vice president and chief financial officer, according to participants.

    Under the terms still being negotiated, Providence has committed to invest the most money with $450 million. Sony and Texas Pacific Group -- based in Fort Worth with a regional office in San Francisco -- will each invest about $300 million, as will Comcast if the deal is completed. DLJ Merchant Banking Partners, a unit of Credit Suisse First Boston, will invest about $250 million. J.P. Morgan Chase will finance the deal with a $4 billion loan. Quadrangle Partners has been invited to become an investor, the executives said, but has yet to make a commitment.

- Arik

Posted by Arik Johnson at September 17, 2004 04:24 PM | TrackBack