MGM: On the Block, Again

MGM's private equity owners are shopping it for $5.2 billion, but the fabled studio faces skeptical bidders and a ticking clock on its credit line

by Ronald Grover

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Editor's note: The following version of a story published Aug. 22, 2008 corrects how much of a $500 million revolving credit line MGM has committed and removes an incorrect deadline for when United Artists must produce four films.

The fabled MGM studios, which seems to have had more owners than its James Bond character has had lady friends, is on the block once more. The studio, currently owned by a consortium that includes private equity funds and cable giant Comcast (CMCSA), has asked Goldman Sachs (GS) to sound out potential suitors, according to two sources with knowledge of the process. The asking price—said to be $5.2 billion—is considered hefty for a company that has had few hits and recently jettisoned one of its two top filmmaking executives.

Metro-Goldwyn-Mayer refused to comment. But those with knowledge of the overtures say the company has asked Goldman, which advised the studio when it was last sold in 2004, to focus primarily on so-called strategic buyers—namely other entertainment companies that would likely fold MGM into existing operations. Among those who are said to have taken a look, and so far passed, is the Mumbai-based Reliance ADA Group, which is reportedly in the final stages of providing $500 million in funding to director Steven Spielberg to establish a new DreamWorks film company. Reliance could not be reached for comment.

The decision for MGM to sound out potential buyers is said to have come from its private equity owners, including Providence Equity Partners and TPG. Those two firms, along with Comcast and Sony (SNE), paid roughly $5 billion in debt and equity in September 2004 to acquire the then-publicly traded MGM from its majority owner, billionaire Kirk Kerkorian. In a twist, Kerkorian is said to have recently offered roughly $3 billion for the 84-year-old company, a bid that was quickly dismissed. Kerkorian was not available for comment on Aug. 22.

DECLINING DVD REVENUES

Even so, it is unlikely that the current MGM owners will get their $5.2 billion asking price, according to one prominent Wall Street dealmaker who has been privy to the thinking of potential buyers. The studio, home to such iconic franchises as James Bond, Rocky, and the Pink Panther, generates much of its revenue from a 4,000-title library of older films. Last year that catalog generated $558 million in cash, but the DVD market has begun to decline seriously. At the end of August, the company will get the last of a series of distribution fees totaling $625 million from News Corp.'s Twentieth Century Fox (NWS), which distributes MGM's DVDs. The private company lost $400 million in its most recent fiscal year, which ended in March, MGM told The New York Times (NYT) recently.