An unusual casting call has attracted some of Hollywood's biggest moguls. The role: rescuer of Metro-Goldwyn-Mayer, the film studio struggling under $3.7 billion in debt left over from a 2005 buyout.
Former News Corp. (NWS) President Peter Chernin and Jonathan Dolgen, Viacom's onetime Hollywood chief, recently met with MGM's creditors to discuss the studio. Those creditors must figure out whether it makes more financial sense to sell to Time Warner (TWX), the high bidder in a March auction, or to run the studio themselves. MGM, owner of franchises that include James Bond and Pink Panther, is suffering from a lack of hits and the industrywide slump in DVD sales.
The lenders, which include Highland Capital Management (HCF) and Anchorage Advisors, already have learned one of Hollywood's first lessons: Never bet your own money on the movie business. Loans that traded at 65 percent of face value in January changed hands for as little as 43 percent in late May—valuing the company at $1.6 billion. That's close to Time Warner's $1.5 million high bid, according to people with knowledge of the auction. If the creditors decide to turn it down and go into show business themselves, they may have to put up some $500 million to jump-start production.
"They're trying to understand how they do it," says Clark Hallren, managing partner of the Los Angeles-based entertainment advisory Clear Scope Partners. "Do we need to keep domestic theatrical distribution? Do we continue to outsource home-video distribution? What kind of movies should we make?"
Delays in resolving MGM's fate have further clouded its outlook. Producers Barbara Broccoli and Michael Wilson, who co-own the lucrative 007 brand with MGM, suspended production on the 23rd Bond film in April, citing "uncertainty"about the studio's future. On May 30, director Guillermo del Toro bailed from MGM's upcoming The Hobbit, a J.R.R. Tolkien movie. MGM shares the rights to The Hobbit with Warner Bros. "The film business can be awfully seductive," said former Universal Studios Chairman Frank Biondi, who advised some of the private equity investors who bought MGM for $5 billion in 2005. "I told them then that they had a melting ice cube."
The Broccoli family has urged Warner Bros. to stay in the bidding, said three people with knowledge of the situation. Scott Rowe, a spokesman for Warner Bros., declined to comment, as did Susie Arons, an outside spokeswoman for MGM. Stephanie Wenborn, a spokeswoman for Broccoli and Wilson's London-based Eon Productions, also declined to comment.
With new management, the creditors hope to boost production, cut costs, and eventually seek a price of more than $2 billion for the studio, said two people who have discussed the plan with them. Finding ways to maximize MGM's value won't be easy, says Mark Patricof, managing partner of investment bank MESA. "There are not that many new faces out there with a lot of new ideas for MGM to consider," he says.
Patricof says the creditors should instead sell off MGM's assets, including its rights to the Stargate TV series. The Bond franchise could fetch $750 million alone, according to Douglas Lowell, who advises independent film companies on film financing. Its last five installments averaged $461 million in worldwide ticket sales. Whatever the outcome, the creditors aren't the only ones looking to get paid. Actor Tom Cruise, who signed on with MGM in 2006 and helped raise $500 million to produce films, owns a 30 percent stake of MGM's United Artists film unit, according to one former MGM executive. "Tom is protected and will be fine," says Cruise's attorney, Bert Fields.
The bottom line: MGM's valuable franchises make creditors believe they can profit by reviving the storied studio. It won't be easy.