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Joseph J. DiPietro of DiPietro, PLLC
The financial hardships of Metro-Goldwyn-Mayer ("MGM"), perhaps one of the greatest movie studios that ever was, have functioned to lead it down the same road as other long-standing, iconic institutions of American commerce and culture, namely Lehman Brothers and General Motors. Though MGM has not filed for bankruptcy protection yet, fatigued creditors recently granted a sixth extension on debt payments until September 15, 2010. Discussions with MGM's 140 creditors persist simultaneously with merger discussions; suitors include Spyglass, Lions Gate Entertainment, Time Warner, and Summit. It seems that the most viable outcome is a prepackaged bankruptcy in which creditors would receive equity in the new entity and would release MGM from existing obligations. MGM's high level of leverage has left it in a particularly precarious position, and the motion picture studio industry as a whole has buckled under the force of the great recession. For example, potential purchaser Lions Gate has lost 50 percent of its value over the past three years. Despite a revenue model dependent on blockbuster hits and profits from DVD sales, MGM managed to produce only one film last year, a rather unremarkable remake of "Fame." MGM controls nearly 4,000 titles in its film library, including the "James Bond" and "Pink Panther" franchises. However, slumping DVD sales linked to a recessionary economic climate have placed severe downward pressure on revenues. As a result, MGM cannot service its existing debt obligations. MGM's highest current offer is approximately 40 percent of its $5 billion 2004 purchase price.1 2004 Acquisition By Sony-Led Coalition MGM's distressed financial condition can be traced back to its 2004 debt-laden acquisition by a Sonyled consortium, which included the Comcast Corporation and private equity firms Texas Pacific Group and Providence Equity Partners. Sony, already the owner of Columbia and TriStar studios, coveted access to MGM's film library. The deal was structured in a manner that allowed Sony to avoid assuming significant additional debt, thus shifting that risk to its partners.2 The acquisition of MGM was consistent with Sony's high-level corporate strategy – i.e., it was the next piece of the puzzle in Sony's quest to become a company that generates revenue through all stages of product development and distribution in the music and movies entertainment market. With regard to MGM's extensive film library, Sony intended to rerecord the movies in digital format and add special features such as director commentary and previously unreleased scenes.3 Sony hoped that this transaction would shift market share in the Blu-Ray DVD market to its favor and help secure Blu-Ray's dominance over the HD-DVD format. Sony intended to leverage its other platforms including PlayStation game consoles and cell phones.
© 2010 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 37 edition of the Bloomberg Law Reports—Bankruptcy Law. Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. The discussions set forth in this report are for informational purposes only. They do not take into account the qualifications, exceptions and other considerations that may be relevant to particular situations. These discussions should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Any tax information contained in this report is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. The opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content contained in this report and do not make any representation or warranty as to its completeness or accuracy.
Reprinted with permission. "We don't plan to enter a business that loses money.11 The extensions from MGM's creditors are intended to provide sufficient breathing room to negotiate a deal that will yield them equity to recoup losses in the future.000 film title library. which has been postponed indefinitely as a result of the financial struggle. who had recently increased his stake in the company to upwards of 37. Prior to MGM's sixth extension from creditors in mid-July. The initial auction at the end of 2009 yielded low bids. which also happens to own all of the rights to MGM's pre-1986 library. Although Mr. Originally published by Bloomberg Finance L. Many believe that MGM's restoration to solvency depends on the performance of its upcoming films. As MGM was about to change ownership for the fourth time at the hands of Kirk Kerkorian. causing Lions Gate to withdraw a previous bid.10 Initial bids also came from Lions Gate. Krispy Kreme Doughnuts Corp.. © 2010 Bloomberg Finance L. in part thanks to Dallas Mavericks owner Mark Cuban's tender of 4 percent of his outstanding shares. Sony.5 billion from Time Warner. This prompted Mr.8 His first attempt at convincing lenders to restructure the company's long-term debt was unsuccessful. United Artists. and of course. MGM fired CEO Harry Sloan and hired turnaround specialist Stephen Cooper.00 per share and the assumption of approximately $2 billion in debt. 2004. dismal DVD sales7. Sharp. MGM and its subsidiary. None of the offers even came close to the amount of debt that MGM is carrying on the balance sheet. Spyglass & Lions Gate Heading into the home-stretch. The offers contemplated a prepackaged bankruptcy as part of the transaction. and Reliance Entertainment. No. Cooper to explore alternatives. Samsung. MGM is emerging from the economic collapse and faces substantially reduced revenue from its prize film library. Sony also had a score to settle with Toshiba from the early 1990s. The Blu-Ray lobby consisted of consumer electronics concerns such as Panasonic. and a sale of the rights to the "James Bond" franchise and half-ownership in the two "The Hobbit" films. Cooper has been at the forefront of other high- profile turnarounds and corporate financial calamities. especially the new "James Bond" movie. All rights reserved. 37 edition of the Bloomberg Law Reports—Bankruptcy Law.9 MGM had potential bidders sign a strict nondisclosure agreement that prevented disclosure of financial information to MGM's creditors. both of which have undetermined release dates in the future.5 billion. Relativity Media. News Corp. all initial bids were less than $2. This presentation took place during a truce involving an ongoing hostile takeover attempt by Carl Icahn. have not enjoyed the same historic success at the box office that they once had. 4.5 The deal was valued at nearly $5 billion. Icahn had publicly criticized the proposed merger earlier in the year.4 On September 24. including a merger. and was anchored by $1. which requires approximately $250 million in annual interest payments. 2009. Mr.3 percent. in the Vol. MGM has been fighting off creditors and chapter 11 bankruptcy for well over a year. and approximately $3. Besides fierce competition related to the existing struggle for market dominance. Nobuyuki Idei memorably stated. Spyglass and Lions Gate are the two most likely candidates to purchase MGM and Lions Gate is a distant second.7 billion in debt. the buyout team led by Sony reached a definitive agreement to purchase Metro-Goldwyn-Mayer for $12.The two factions in the battle for DVD format supremacy were HD-DVD and Blu-Ray. On August 17. . an auction of the rights to the 4. when Toshiba edged out a victory related to the first generation of DVD technology. Other films that have been postponed are the remake of "Red Dawn" and the "Robocop" reboot."6 Fast Forward to the Present Five years later.. Toshiba and NEC led the charge for HD-DVD and hoped that their efforts would result in the computer rather than the DVD player becoming the preferred viewing method going forward.P. Lions Gate made an official proposed merger presentation to MGM. including Enron. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L. Sony's then-chief executive. and Collins & Aikman Corp.12 Mr.P.P.
html?scp=202&sq=metro-goldwynmayer&st=nyt. in the Vol. which include J. © 2010 Bloomberg Finance L. Lions Gate does not have much room to maneuver with regard to financing the move with additional debt. Icahn. and Lions Gate is unable to tender an acceptable offer both to MGM and Mr. No. Mr. as MGM's creditors would surrender anywhere between 25 to 50 percent of their equity in a transaction with Lions Gate. DiPietro is a bankruptcy and restructuring attorney with DiPietro. The bottom line is that MGM cannot service the debt as it stands. two years to the day of Lehman Brothers' extraordinary chapter 11 filing. If the prepackaged scenario involving Spyglass fails. PLLC in Washington. albeit involuntarily.Y." If creditors reject the plan or are unable to agree on alterations with MGM.Y. 4 Ken Belson.P. http://www.nytimes. are being worked out between creditors and Spyglass co-heads Gary Barber and Roger Birnbaum. A prepackaged bankruptcy providing equity in the new MGM to most creditors in exchange for debt forgiveness will create the most value for slighted lenders. All rights reserved. Joseph J. Times. 2004. May 20. Competing For DVD Supremacy. Sony Group Said To Be In Talks To Buy MGM. Icahn.5 billion is still on the table.html?scp=213&sq=metro-goldwyn-mayer&st=nyt. VA. 4. it appears as though the details of a prepackaged bankruptcy. http://www.P. MGM's creditors. 2 Andrew Ross Sorkin and Geraldine Fabrikant. are currently conducting due diligence and could endorse the plan as early as next week. Times. Time Warner's meager offer of $1. it faces what could be the last deadline extension for repayment of existing debt obligations.nytimes. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L. MGM may still find itself operating under the protection of chapter 11. notable pieces include "The Sixth Sense" and "Seabiscuit. Originally published by Bloomberg Finance L. and Lions Gate is waiting in the wings. Sony Says It Is Negotiating Possible MGM Acquisition. which marked a sharp. any merger would require his approval. J.000 title collection.13 A dilution of that magnitude may be a deal-breaker for some creditors. including a resurrection of the latest "James Bond" project and the two planned pictures of "The Hobbit. 2004. as their current debt load is $550 million.14 The plan under review has the new studio producing several movies per year. who has shown no sign of relenting to secure a 50 percent stake in the company. Barber and Mr.. Icahn. http://www. N.com/2004/05/20/business/sonysays-it-is-negotiating-possible-mgmacquisition.nytimes. Reprinted with permission.Y. Summit Entertainment is also poised to reenter. September 20. and creditors would forgive nearly all of MGM's debt in a swap for equity. which may take place as early as late September. 2010. Grappling With Studios' Lost Clout.Icahn's latest grab leaves him with "negative control" of the company until he can secure control of operations by reaching a 50 percent stake.P. 2004.dipietropllc. Morgan Chase & Co. Anchorage Advisors. and two-thirds approval from creditors is required for approval in bankruptcy court. and Davidson Kempner Capital Management. . Birnbaum would add approximately 15 motion picture titles to MGM's 4. The creditor side of the equation reveals additional complications related to Mr. The state of current deliberations would provide Barber and Birnbaum with a 4 to 5 percent ownership stake in the new MGM.Y. 2010." Distribution would be handled by one of the six available major studios. downward inflection point in the economic malaise that has crippled MGM. https://www. Morgan is reportedly prepared to supply MGM with $150 to $200 million in debtor-inpossession financing as it navigates through chapter 11 proceedings.com 1 Michael Cieply and Brooks Barnes. April 22. 37 edition of the Bloomberg Law Reports—Bankruptcy Law. DC and Alexandria. Times. Highland Capital Management. In Hollywood.com/2004/04/22/business/sonygroup-said-to-be-in-talks-to-buymgm. The Bottom Line On September 15. January 18.P. N. at B1. and any issuance of new equity to finance the transaction would dilute the ownership of Mr. N.html?scp=179&sq=metro-goldwyn-mayer&st=nyt.P. 3 Todd Zaun. At this point. Notably.com/2004/09/20/technology/20ne wcon. Spyglass Entertainment is close to finalizing arrangements to take over MGM once the debt load has been restructured. N. Times.
wsj. J. Expertise Ranges From Telephones to Doughnuts.E. 14 Id. 2010. at B9.html?KEYWORDS=cuban+and +lions+gate. 2009. 6 Zaun. January 22..Y.com/article/SB10001424052748703589 804575445412622779460. December 23.P.. in the Vol. Shuker and Peter Lattman.Company News.. 2009. Schuker. http://online. August 22. http://query. 7 Nat Worden. de la Merced.. http://online. http://online. 8 Michael Corkery and Peter Lattman.E. 12 Nat Worden. Wall St. Wall St. March 10. Sept. Reprinted with permission. J.com/article/SB10001424052748703513 604575310853660453946. 5 © 2010 Bloomberg Finance L. 11 Mike Spector and Lauren A. All rights reserved. 2010.Y. N.P. 37 edition of the Bloomberg Law Reports—Bankruptcy Law. 2010.com/gst/fullpage. 2004.. Wall St. Icahn To Hold 31% Stake In Lions Gate. supra note 3. Times. 24. http://blogs.wsj. N.E.html?KEYWORDS=metrogoldwyn-mayer. Auction Alone Unlikely to Resolve MGM Woes.wsj.html?KEYWORDS=metrogoldwyn-mayer.nytimes. August 11. J. June 16.html?res=9D02E7 DF1E39F937A1575AC0A9629C8B63&scp=178&sq=metro -goldwyn-mayer&st=nyt. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L. 13 Mike Spector and Lauren A. MGM: We Won't Sell To Just Anybody. 9 Michael J. Wall St. .com/deals/2009/12/23/mgm-wewont-sell-to-just-anybody/?KEYWORDS=metro-goldwynmayer. Wall St. Wall St. J. A Rescue of MGM Studios On Horizon With Spyglass. No. 2010.wsj. Times. J. Originally published by Bloomberg Finance L.com/article/SB10001424052748704164 904575421560480184200. August 20.. 4. Schuker. Consortium Led By Sony Locks Up MGM Deal.P. at A18. J. 10 Lauren A. Studios Seek Out Backup To DVDs. MGM To Be Considering a Prepackaged Bankruptcy. at B3. 2010.
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