MGM State of Financial Health

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The next few 6 months to a year are not only the best time, but probably the only chance to get MGM refinanced before their 2012 maturity.

UPDATE 1-MGM eyes $3.7 bln debt refinancing-source

Thu May 14, 2009

* MGM hires Moelis to renegotiate $3.7 bln in loans

* Studio MGM ends FY 2009 with $500 mln cash flow -source

* JPMorgan to lead group of 140 creditors -source

* MGM says still in compliance with all loan covenants (Adds company statement, background, byline)

By Sue Zeidler

LOS ANGELES, May 14 (Reuters) - Hollywood studio Metro-Goldwyn-Mayer said it hired investment bank Moelis & Co to help refinance $3.7 billion debt and is talking with a steering committee of 140 creditors as part of the process.

The storied MGM, home to the James Bond movie franchise, said it had discussed its annual financial results with lenders on Thursday, adding that they were in line with its budget and that the company was in compliance with all loan covenants.

A source familiar with the matter said MGM finished the year with over $500 million in cash flow from its film and TV library operations, down about 5 percent from a year ago.

In a statement, MGM said "it was exploring options for optimizing its capital structure and has begun talks with a steering committee of its lenders as part of the process."

MGM reiterated its commitment to staying independent.

The creditors of MGM, which has various movies in the pipeline from "Fame," to "Zookeeper," have formed a steering committee led by JPMorgan Chase & Co (JPM.N), according to another source familiar with the matter.

MGM is owned by a consortium of companies, including private equity firms TPG Capital LP [TPG.UL] and Providence Equity Partners, Sony Corp (6758.T) and Comcast Corp (CMCSA.O), which paid about $5 billion in debt and equity in September 2004 to buy the then-publicly traded studio from its majority owner, billionaire Kirk Kerkorian.

Merger specialists have said MGM could be worth $2 billion to $2.5 billion, but it has repeatedly said it is not for sale.

Rumors of its potential sale surface from time to time and were recently rekindled with unconfirmed reports that billionaire financier Carl Icahn was buying MGM debt, which sparked speculation he may push for a combination of MGM with Lions Gate Entertainment (LGF.N), another studio Icahn has sought influence over.

Sale rumors also surfaced last summer with the departure of producer Paula Wagner from MGM's United Artists studio in August.

Bankers estimate MGM is paying north of $250 million a year in interest on the debt, which comes due in 2012.

The sources said MGM was potentially seeking a way to make the loan due later, or reduce it in size.

The studio also hired Goldman Sachs in August and said it was exploring "enhancements" to its long-term capital structure.

Wagner, who is a movie producing partner with actor Tom Cruise, was chief executive of UA, but left to produce movies again. UA, in which Cruise and Wagner both have stakes, last year secured $500 million in financing through Merrill Lynch to fund 15 to 18 movies over the next five years. (Reporting by Sue Zeidler, editing by Gerald E. McCormick, Bernard Orr)

http://www.reuters.com/article/rbssFina ... dChannel=0

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The bank debt maturing in April of 2012 rose by 3.7 to an average of 54/100 or 54% during the last week.

The banks like something in the discussions/negotiations that have been going on.

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I am amazed that they (the banks) already went along with a maturity extension out to 2012 without a management change. The idea Sloan has been enacting of increasing production commitments beyond any possible coverage by their cash flow and beyond any existing credit commitments is silly. He said earlier he thought that starting up and/or participating in new big projects increases value. No it does not. A management change and a strategy change is in order and may be coming soon.

BY NIKKI FINKE
Published on May 20, 2009 at 8:18pm
MGM Fights To Survive

And you think your monthly credit-card payments are steep? Faced with $3.7 billion in debt due in July 2012, beleaguered MGM will pay $250 million in interest alone by April 2010. Just think if that money could be spent on actual film production.

Shame on Harry Sloan, who has been running the moribund studio ever since 2005, when Sony and Comcast and Providence Equity Partners and TPG Capital paid roughly $5 billion in debt and equity to acquire then–publicly traded MGM from its majority owner Kirk Kerkorian. But Sloan waited, and waited, and waited to put MGM on firm financial footing. Then, the credit crisis began.

In all fairness, most business leaders were caught by this crisis, but still they should all pay the penalty. After all, they are paid a lot of money to anticipate the unexpected. Any fool can get caught unprepared.

Now I hear his production boss Mary Parent is helping to make that happen, after nagging everyone to get ahead of this coming 2012 crisis with the intent of freeing up the company from some of the long-term debt to allow additional capital to finance more productions for her. The good news is that MGM (a private company so, frankly, it can claim anything it wants to without fear of the SEC) isn’t going out of business right this minute. Not with a library that throws off half a billion dollars annually.

But what productions and what strategy? The fact they have a library throwing off $500 million annually is why the company will be restructured and survive, and why with the right strategy they can stay independent.

In fact, the studio is making movies. And it reported May 14 that it made its numbers for last year and is current on its debt payments. I’d love to believe this. Even more, I’m relieved the studio is coming clean about its problems after I’d been hearing for the past month that MGM debt holders and equity stakeholders have been fighting to the point where both sides are “on a war footing.” That’s been exacerbated by the coming audit this summer to identify whether projects are really under way in film and TV. The fear is, if the auditors were to represent that the studio isn’t a going concern, that would bring on a battle royal.

Management can't come clean about its problem because that would be suicide. As far as a 'war' between debt holders and equity stakeholders, no. When the time is right the former are going to wipe out the latter putting in place new management and, hopefully, a new strategy.

And what would a viable strategy look like?
Given the lack of deep pockets behind the company, and the need to keep debt levels modest (finally please learn at least this lesson already), a revitalized MGM should 1) ignore / avoid mega projects that the companies with deep pockets are getting involved in 2) focus on several modest projects annually (max $20 million budget) 3) emphasizing story driven scripts - no expensive special effect movies 4) avoid expensive talent - there are just too many 'undiscovered' actors and writers out there to pay multi-million dollar fees and salaries

In any case the decision time is approaching triggered by an event of default. Likely that will be the auditor refusing to sign off on the company as a going concern with its current capital structure and its increasing obligations.

There are rumors that both corporate raider/shareholder activist Carl Icahn is circling to buy the company as well as Relativity’s hedge-fund backer. And then there’s the chatter that the deal with Merrill Lynch to finance production at MGM’s UA is “hanging by a thread.”

What I and other journalists had reported about Goldman Sachs trying to come to the rescue is still true. GS has been helping to raise more capital. I’m told that one possibility explored was that MGM would sell off United Artists. (The cash from the sale would have been used for operational needs at MGM. But the banks that relied on that asset would have to sign off on such a deal.)

Now investment bankers Moelis & Co. have been hired to advise the studio on a potential restructuring and to explore options for optimizing its capital structure (i.e., talking to lenders about altering MGM’s long-term debt obligations). “You lower your interest payments, you free up cash to make more movies,” a source tells me. “With debt selling at a discount [50 cents on the dollar], every company is doing the same.”

This would make a great comedy plot. There is one large bank group of 140 banks. The financial advisor is probably going to recommend to the banks something like this: you banks advance us more debt/cash and agree to reduce your existing debt by 2/3rds or so, leaving the existing owners and management in place (that would be the owners and management who created the problem resulting in the debt holders losing a couple billion bucks, now wouldn't it?) The banks are likely to come back with (as soon as an event of default occurs) let's put you into bankruptcy, wipe out your equity, and only then when the banks become the new owners will we agree to reducing debt, and by the way management is terminated. We'll get someone new - could they do any worse?

I hope this new plan of attack can help. Because it’s vital to Hollywood that this buyer survive. Everyone knows that Mary Parent has been holding the studio together with the equivalent of chicken wire: specifically by partnering with studios left and right because they are willing to front the costs of each production. Things aren’t much better on the TV side. And if the auditors declare MGM technically insolvent, all hell breaks loose.

Soon, soon.
Unfortunately to get to the resurrection, one needs the death part first.

http://www.laweekly.com/2009-05-21/news ... ood-style/

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MGM bank debt is trading up in the secondary market - increased almost 3 points over prior week to a current level of about 56.85

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MGM debt in the secondary market still hovers around 56%.

It must have traded up above that because it is recorded as having dropped almost 2 in the last week.

With 140 institutions holding the debt the market price is probably reflecting the situation - which is not good - pretty well.

Other companies are trading at;
Toys R Us is at 88%
Six Flags Theme Parks (just declared bankruptcy) is at 78%
Even Blockbuster is at 77%

I talked to someone in the entertainment business that likes to keep up with the local gossip. They seemed to feel that it's heading towards liquidation - the value is in the library not in continuing as an independent maker of movies and TV shows.

Liquidation sounds bad and it is. I always feel bad for people in a company with a long history that might lose their jobs because the guys at the top screw up in a big way (and still collect their bonuses!!). It would mean that the huge MGM library would be sold off to highest bidder(s). It would mean that the rights to the franchises would also be sold off.

So, as bad as this sounds in an ironic way it could mean we see another installment sooner vs later. Somebody with money buys the rights to DLM and perhaps even hires some of the key talent (middle level people) involved and gets producing. This could be very good or very very bad, depending on what they think should be done with it (e.g. of very bad say a musical version of DLM, for me, I know I would list that under very very very bad things).

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A couple of articles updating the situation at MGM:

Deal chatter heats up in Hollywood

By Anupreeta Das and Jui Chakravorty Das
Reuters
Thursday, July 2, 2009; 4:04 PM

NEW YORK (Reuters) - Dealmaking in Hollywood could get hot and heavy in coming months as movie studios explore ways to fight tumbling DVD sales and distribute entertainment in new formats.

Even as the recession squeezes financing from Wall Street banks and funds, the deal chatter has picked up because studios have already cut expenses and are looking for new growth opportunities for their movies, TV series and other content.

And Liberty Media Corp chief John Malone told shareholders last week that Sony Pictures and privately held Metro-Goldwyn-Mayer could be up for sale soon.

"What we're hearing is everybody's talking to each other on how to get joint ventures and structure costs," said veteran investor Mario Gabelli, whose Gamco Investors owns Viacom stock. "It's driven by how do you reduce costs, how do you raise financing, how do you distribute products globally."

With little hope of DVD sales picking up -- as online and mobile technologies change the way people view entertainment -- media bankers expect consolidation, but say more studios will prefer to combine units or strike partnerships and joint ventures rather than buy each other outright.

Bankers and analysts say cable companies like Comcast Corpcould make a play for the rich content libraries that studios own. Comcast, the No. 1 U.S. cable operator, already owns a stake in MGM, which also counts private equity firms Quadrangle and Providence Equity Partners among its owners.

A fourth media banker suggested that Lions Gate Entertainment Corp could be a good fit for Comcast because it could transform the independent studio's wealth of content into a cable network.

All four bankers requested anonymity because they do business with these studios or their parent companies.

Gamco analyst Chris Marangi said the popularity of video-on-demand could spur Time Warner Cable Inc and Cablevision Systems Corp to seek more content deals but added these smaller cable operators were unlikely to want to buy a studio and get into content creation themselves,

He said News Corp, Sony or Time Warner could absorb the trimmer Paramount if it were in play, while Lions Gate and the debt-ridden MGM are unlikely suitors.

Bankers generally see the major studios as possible buyers, and smaller rivals like Lions Gate, MGM and Dreamworks Animation as potential targets.

Most of these studios trade at about 6 to 7 times earnings before interest, taxes, depreciation and amortization, the fourth banker said, adding that the value of MGM is at par or below its total debt of $3.7 billion.

Investor Carl Icahn tussled with Lions Gate earlier this year, calling its expenses extremely high and seeking board seats. Icahn was also rumored to be buying up MGM debt with the goal of forcing a merger of Lions Gate and MGM, but any such plan has not seen the light of day.

Gabelli said investor activism was tough in the movie business because studios are usually owned by huge conglomerates. "Nobody's going to pressure Murdoch to do anything or Sumner Redstone or Jeff Bewkes," he said, referring to the heads of News Corp, Viacom and Time Warner.

Rather, media companies are taking the initiative in dealmaking among movie studios as they search for new sources of profit or seek to dispose of ill-fitting assets.

http://www.washingtonpost.com/wp-dyn/co ... 02792.html

Interesting calculations that led to this statement - adding that the value of MGM is at par or below its total debt of $3.7 billion - given that the debt trades in the secondary markets at less than 60/100??


Another one:

Metro-Goldwyn-Mayer expects audit report next week

Thu Jul 9, 2009 10:20pm EDT

By Sue Zeidler

LOS ANGELES (Reuters) - Results of a key independent audit of Metro-Goldwyn-Mayer are due next week and sources expect it to show that the troubled studio is financially sound enough to continue operating.

MGM, which is scrambling to refinance $3.7 billion in debt, had said results of an audit, conducted by the Bank of Montreal beginning in June, are due around July 14.

Two sources familiar with the studio, home to the James Bond franchise, said they expect MGM will be deemed a "going concern," implying that it can continue operations in the foreseeable future.

A source familiar with the studio said there was no reason to believe MGM would not get the going concern status, based on its rich library valuation.

The source said its film and TV library operations generated about $500 million in cash flow in its latest fiscal year ended March 31, down about 5 percent from a year earlier.

MGM declined to comment.

Bank of Montreal representative were not available for comment.

Expectations for a thumbs-up "going concern" opinion was first cited on Nikki Finke's DeadlineHollywood.com blog. Such an opinion would be a huge triumph for the studio because if it is not deemed to be a going concern, MGM could potentially see some of its debt covenants triggered or it could be forced to declare itself insolvent.

MGM faces a payment of $250 million in April 2010 on its revolving credit, with the $3.7 billion in term debt due in June 2012.

The debt largely stems from a 2004 acquisition of MGM by an investor group. MGM is owned by a consortium of companies, including private equity firms TPG Capital LP and Providence Equity Partners, Sony Corp and Comcast Corp, which paid about $5 billion in debt and equity in September 2004 to buy the then-publicly traded studio from its majority owner, billionaire Kirk Kerkorian.

Rumors of MGM's potential sale surface frequently, with merger specialists pegging the studio to be worth $2 billion to $2.5 billion, but MGM has repeatedly said it was not for sale.

One Hollywood executive said private equity fund Qualia Capital LLC has recently expressed interest in MGM but he did not believe it has had any talks with the company.

A Qualia spokesman declined to comment.

Takeover rumors also were rekindled this past spring when unconfirmed news reports surfaced that billionaire financier Carl Icahn was buying MGM debt, which sparked speculation he may push for a combination of MGM with Lions Gate Entertainment, another studio over which Icahn has sought influence.

Sale rumors also surfaced last August with the departure of producer Paula Wagner from MGM's United Artists studio.

GM hired Goldman Sachs last summer to explore enhancements to its capital structure.

In May, MGM hired investment bank Moelis & Co to help refinance its debt. Sources close to the studio said then that it was seeking a way to make the $3.7 billion loan due later, or reduce it in size.

MGM said in a statement in May that it had started talks with a steering committee of its lenders, led by JPMorgan Chase & Co.

http://www.reuters.com/article/industry ... dChannel=0

By one estimate (above) the company has about $1.2 - 1.7 billion too much in debt. It has repeatedly tried to restructure /reduce this debt without success. In this deteriorating economic environment (it's far from over) some CPA firm is contemplating signing off on the company being a 'going concern'. I wonder what the chances are that the CPA firm will get sued for making such a statement.

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Here's another take on the audit pass for MGM:

TOLDJA! MGM Audit Shows Full Compliance With All Debt Covenants; EXCLUSIVE UPDATE: Studio Library Valued At $5.5B
MGM just issued this statement, which confirms my reporting from July 8th that this would happen. And see my exclusive update below:

EXCLUSIVE UPDATE: Meanwhile, there's more good news for the struggling studio. I'm told that the Bank of Montreal has come back with a valuation of MGM's 4,000+plus title library that exceeds the $5.5 billion required under MGM's term loan. So that library valuation and this audit's "going concern" opinion will mean no default issues in the near term for the company.

But the studio is by no means out of the woods in the long term. There is still the $250 million revolving credit facility with a maturity date of April 2010 hanging out there. Can MGM in its current financial configuration, be able to refinance that loan? This questioning puts tremendous pressure on MGM execs, especially production head Mary Parent, to conduct "business as normal" as fears mount among 3rd parties this fall and next winter that MGM may be headed to a Chapter 11 filing.

I first reported about the hurdle of the audit of MGM's activities, especially its TV and movie production slate, back on May 14th when the studio announced it was taking steps to restructure in the face of a total $3.7 billion in debt due in July 2012. For months, MGM debtholders and equity stakeholders had been fighting to the point where both sides were "on a war footing". Had the audit gone the other way, then thumbs-down could have triggered covenants forcing MGM to declare itself insolvent and/or repay its massive debt. In short, all hell could have broken loose.

Not to mention leaving production head Mary Parent in the lurch after she's been holding the studio together with the equivalent of chicken wire by partnering with studios left and right because they are willing to front the costs of each film. She also has been making some of the slate with the money from United Artist's deal with Merrill Lynch. MGM had been arguing that the best way to maintain the value of the studio's assets was to stay in the production business. And thus allow the $250M revolver debt due in April 2010 to get replenished from MGM's revenues like box office.

Also breathing a sigh of relief (if he doesn't get bounced) is studio topper Harry Sloan who took over the moribund MGM/UA in 2005 after Sony and Comcast and Providence Equity Partners and TPG Capital paid roughly $5 billion in debt and equity to acquire then publicly traded MGM from its majority owner Kirk Kerkorian. Sloan has to live with the fact that he waited until the worldwide credit crisis had begun to try to put MGM on firmer financial footing. Now Goldman Sachs is helping raise more capital. And other investment bankers Moelis & Co have been hired to advise the studio on a potential restructuring and to explore options for optimizing its capital structure (i.e. talking to lenders about altering MGM's long-term debt obligations).

http://www.deadlinehollywooddaily.com/t ... covenants/

MGM had been arguing that the best way to maintain the value of the studio's assets was to stay in the production business. And thus allow the $250M revolver debt due in April 2010 to get replenished from MGM's revenues like box office.

Re: staying in the production business:
There's a big difference between generating commitments to deploy future cash flow that doesn't exist and doing business that generates positive cash flow (i.e. make money - ideally in the near term). The former lowers value while the latter increases it. Are Mary's activities the former or the latter?

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From the LA Times:

COMPANY TOWN
Harry Sloan out as CEO at MGM
The debt-ridden studio will be overseen by three executives, including restructuring expert Stephen Cooper.

By Claudia Eller
August 19, 2009

The Tuesday ouster of Harry Sloan as chief executive of Metro-Goldwyn-Mayer Inc. underscores the continued turmoil at the debt-ridden independent studio since it was taken over by private equity owners five years ago.

MGM, which is struggling to refinance its $3.7-billion bank loan, will be overseen by a newly created "office of the CEO," composed of production head Mary Parent, Chief Financial Officer Bedi A. Singh and Stephen F. Cooper, a restructuring expert who joins the Century City company as vice chairman.

A successful media entrepreneur who had never run a major studio, Sloan was recruited in 2005 by MGM's consortium of owners, which includes Sony Corp. of America, Comcast Corp. and lead investors Providence Equity Partners and Texas Pacific Group.

At the time, Wall Street said that the investors had overpaid billionaire Kirk Kerkorian for the 80-year-old studio, which cost them $5 billion, despite MGM's valuable film library of 4,000 titles that included the lucrative James Bond and Pink Panther movie franchises.

Since then, Sloan has failed to make MGM a viable competitor in Hollywood. The studio hasn't released a movie since "Valkyrie," starring Tom Cruise, last Christmas. In a much-ballyhooed move in late 2006, Sloan persuaded Cruise and his then-producing partner Paula Wagner to revive MGM's moribund sister studio United Artists. But that misguided move proved disastrous, with Wagner forced out after less than two years.

After two days of intense meetings, MGM's board voted Monday night to push aside Sloan -- exactly one year after the directors gave him a three-year contract extension. MGM said Sloan would be a nonexecutive chairman.

"This is an embarrassment for Harry Sloan, but it's a big black eye for the private equity guys who came marching in with big numbers and were very arrogant," media analyst Harold Vogel said. "Now they have a big loss on their hands and they don't know how to fix it."

Most industry watchers believe that MGM will not survive much longer as an independent studio and is likely to be sold to a bigger media company such as Time Warner Inc. or merged with another movie and TV studio like Lions Gate Entertainment Corp. Qualia Capital, a private investment firm headed by Amir Malin and Ken Schapiro, is actively looking at MGM, said a person with knowledge of the situation.

Parent, a former top executive at Universal Pictures whom Sloan hired in March 2008 to put MGM back in movie production, has been hamstrung by MGM's financial woes and inability to raise sorely needed film funding.

With Sloan moved aside, Parent could have exercised an out in her four-year contract, but is opting to stay put -- at least for now.

"I believe we're going to get through this," Parent said. "And I'm really excited that Steve is on board to guide us."

MGM officials said Cooper, 62, who has more than 30 years of experience as a financial advisor, would focus on improving the company's balance sheet.

A co-founder and former chairman of New York-based Zolfo Cooper, Cooper is billed as a "turnaround industry pioneer." As CEO of Enron Corp. from 2002 to 2005, he led the beleaguered company through its bankruptcy. According to published reports, he was less successful in turning around Krispy Kreme Doughnuts Inc. when he took the helm in 2005, and, more recently, Hawaiian Telcom Communications Inc., which filed for bankruptcy protection last year.

Cooper, who was not available for comment, has his work cut out for him at MGM. Three months ago, the studio hired investment banking firm Moelis & Co. to help restructure its heavy debt, which is owed to 140 creditors. MGM faces a debt payment of nearly $1 billion in June 2011, with the remainder of the loan due in 2012. Also, MGM has a $250-million revolving credit facility that matures in April 2010.

MGM, which employs about 450 people, has largely been funding operations out of cash flow from its library, which in fiscal 2009 generated more than $500 million.

Meanwhile, Parent has aggressively been putting movies into production. MGM's next scheduled release, an $18-million remake of "Fame," co-financed by Lakeshore Entertainment, is due out Sept. 25. The studio has no other movies coming out this year.

MGM has two films in post-production that are poised for release next year: "Cabin in the Woods," a $30-million comic horror-thriller, and "Hot Tub Time Machine," a $35-million comedy starring Jon Cusack. The studio began production this week on a $75-million comedy, "The Zookeeper," starring Kevin James. MGM plans to begin production on a remake of "Red Dawn" in September.

It's unclear whether MGM will have the financial wherewithal to co-finance two big-budget "Hobbit" movies with executive producer Peter Jackson and New Line Cinema/Warner Bros. and to produce the 23rd installment of the James Bond series.

Cooper may be able to negotiate something with the lenders to enable the current owners to maintain control, but it is unlikely. This is short detour before the lenders feel its time to make their move getting rid of the current owners and then either installing new management, keeping Cooper, or proceeding to liquidation.

The problem for Cooper is a lack of funds to pay for new projects (including a modest investment in a new DLM project) which if successful might get them out of the deep hole they're in. No one will want to put new money into a losing situation until the balance sheet is restructured (i.e. debt written off) and that's not likely to happen until the lenders wipe out the current owners (they being the ones who created the mess to begin with who would trust them with even more money?). Wiping out the current owners the lenders can then install new management (or liquidate) and move forward. If Cooper does well they might invite him to stay to transition to another management team.




http://www.latimes.com/business/la-fi-c ... 3585.story

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Here's the article from THR.com highlighted:

It's a matter of life and debt for MGM
Details of restructuring proposal being formulated
By Carl DiOrio
Sept 9, 2009, 11:00 PM ET

MGM's owners appear to know they are going to be left with pennies on the dollar of their $4.9 billion investment.

Details of a restructuring proposal are being formulated by MGM and its advisers. But a series of conference calls between Lion execs and studio creditors have made it plain that the MGM owners' hold on the studio is crumbling.

A recent audit confirmed the Lion is in no imminent danger of insolvency. But cash flow is so tight that MGM execs recently met with liquidity consultants to discuss strategies for navigating relations with the studio's many vendors.

Creditor-side sources say the Lion's consortium of owners -- including investment firms Providence and TPG as well as Comcast and Sony -- will do well to come out of the restructuring with even a 10% stake in the studio.

A restructuring would make roughly 150 MGM creditors majority owners of the studio by converting about $2.5 billion in Lion debt into equity.

MGM chief exec Steve Cooper -- a turnaround specialist brought in by current owners -- recently acknowledged in a conference call with the creditors group, "All right, guys, the debt owns the equity."

That could be strategic posturing, but for now, MGM creditors are giving the studio's new CEO high marks for his forthright style.

"He's brought a refreshing level of candor to the process," one call participant said.

Since Cooper was brought in a month ago to replace Harry Sloan, who continues as MGM's non-executive chairman, it's been apparent the studio's owners were aware of the precariousness of the situation. But Cooper's acknowledgment that their position has eroded dramatically has helped talks with creditors gain fast traction.

Execs at MGM declined comment. A source close to the studio said conference calls with creditors have been "going well" and are "productive."

As for moviemaking during this delicate phase, it is expected to continue unabated through the restructuring period. Pics are being financed via partnerships with other studios and by tapping into a Merrill Lynch-created production fund at MGM's United Artists division.

Cooper is taking on his first Hollywood challenge following turnaround efforts on behalf of Krispy Kreme Doughnuts and a high-profile stint sorting out the Enron bankruptcy. Once an MGM restructuring is completed -- a process expected to take a few months -- the lenders-turned-owners likely will put their equity stake up for auction.

Prospective bidders include Lionsgate, Time Warner and Fox, all of which could fashion stock-and-cash offers for a restructured MGM. The studio's debt will likely be pared to less than $1.5 billion before the auction.

Creditors expect Cooper to deliver a preliminary plan for MGM's restructuring by late October.

Meanwhile, other parties could surface with plans to help MGM recapitalize.

Qualia Capital's Amir Malin, a former CEO at Artisan, has been talking to several parties in a quest to be named to lead the MGM restructuring. The Qualia offer comes with a pledge to invest a substantial sum of its own money in the studio.

MGM's current owners acquired the Lion in April 2005. This year, they hired investment firm Moelis & Co. to conduct what so far has been an unsuccessful search for new capital to bolster the studio's balance sheet.

Lion creditors are led by JPMorgan Securities, which funded MGM's $250 million credit facility that's set to expire in April. The creditors also have retained the Houlihan Lokey investment advisory.

A Preliminary plan won't be out until late October. And, so there's plenty of time for others to step up with offers to buy the studio - e.g. Qualia Capital's rumored offer.


http://www.hollywoodreporter.com/hr/con ... d381f02f26

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MGM has won more time from the bankers - till Dec 15 ....

from WSJ

BUSINESSOCTOBER 2, 2009, 12:58 A.M. ET
MGM Wins Temporary Reprieve on Debt Payments

By LAUREN A. E. SCHUKER

Embattled movie studio Metro-Goldwyn-Mayer Inc. has received temporary relief on making interest payments of nearly $4 billion in debt.

On Thursday, the debt-burdened studio said that its lending group will grant it some reprieve, allowing the company to skip interest payments coming due at the end of September, October, and November. The agreement expires on Dec. 15, when its next interest payment comes due.

In a statement on Thursday, the studio said that the new agreement "provides MGM with additional liquidity as discussions continue regarding the development of an optimal capital structure in support of the Company's long-term business plan."

MGM currently labors under $3.7 billion in debt that comes due in 2012. Interest payments are about $250 million a year. The company also has a $250 million revolving credit facility at J.P. Morgan Chase & Co. that matures in April 2010.

The forbearance agreement will allow the studio, which owns the rights to the James Bond franchise, some time to implement a future business plan. Like other studios in Hollywood, MGM has found it difficult to raise money for new film production in the wake of the global credit crunch. Some of the studios recent films, including "Fame," haven't fared as well at the box office as executives had hoped.

Other sources of revenue, including MGM's library with roughly 4,000 films, have been hit hard as DVD sales began declining. The studio was taken private in 2005 for nearly $5 billion by a group of investors, including Providence Equity Partners, Texas Pacific Group, Sony Corp. and Comcast Corp.

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Development in MGM's resurrection - there will be a detour

Posturing has reset the pieces

MGM and their equity owners got a deferral in interest payments - till Dec 15 vs Jan 15 - but more importantly this will allow them to fund their obligations on the new Hobbit movies at least for now.

Why would the bankers go along with this? There are several likely reasons.

One is that they really didn't want to push them into bankruptcy and potentially (likely) lose their hold on several important franchisees - this Hobbit one is just the most immediate. If they did do it they would likely find themselves on the losing end of a lawsuit for willfully destroying a significant portion of the value of MGM. By deferring they can keep the value intact and wait for a better more opportune situation to take control and remove the current equity owners hopefully without a bankruptcy.

More importantly toward the end of the article it mentions something key: the interest deferrals - in part or perhaps whole - will be coming out of the equity ownership side.

A banking source said some of the tweaks to debt terms will begin to dilute those owners' current equity. A much more dramatic shifting of equity is expected over coming months as lenders agree to convert debt to equity.

Once the lenders become owners, that group likely would conduct an auction for the assets. Nobody sees the lenders group as a long-term operator of MGM.

The current equity owners are now on a nice slippery slope out of the picture. This will - hopefully sooner than later - end with MGM being recapitalized and spun off (not so likely) or auctioned off. In this latter case the question is will the buyer be someone who wants to keep them intact or to strip away and keep the assets only.

http://www.reuters.com/article/filmNews ... 02?sp=true

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Back in May Warner considered buying MGM, but the numbers couldn't be made to work:

From Business Week

Warner Brothers Contemplated, Walked from Buying MGM
Posted by: Ron Grover on October 09

The once fabled MGM studio is hanging by a thread. On Oct. 1, its banks agreed to allow the debt-hobbled studio to forego its monthly debt payments on $3.5 billion in debt through December 15, although bankruptcy remains a distinct possibility after then.

But back in May, I’m told, Warner Brothers(TWX) fancied itself as the white knight that intended to rescue MGM. Well, sort of. Back then, the studio sent its numbers crunchers to do a “deep dive” into MGM’s finances with the intent on buying the studio, according to sources with knowledge of that effort. The Warner Brothers plan: to essentially put MGM out of its misery, shutting down production other than a few high-end titles, notably the James Bond series and the Lord of the Rings prequel The Hobbit.

Warner and MGM aren’t talking, but Warner had every reason to be interested in getting its hands on MGM. It owns the U.S. rights to distribute The Hobbit, which is being produced by Lord of the Rings director Peter Jackson. MGM ahs the foreign rights. And it owns many of the older MGM films, like Gone with the Wind, dating back to Ted Turner’s 1986 deal with then studio owner Kirk Kerkorian.

The problem is that, after adding in the Bond franchise (which is worth perhaps $1 billion by itself) Warner number crunchers figured it would take nearly $2 billion to buy the studio. Even then, Warner would still need to deal with its monster debt. It contemplated buying up that debt, which was then selling at around 50 cents on the dollar, but even that was too pricey.

That numbers being thrown around were more than the studio mavens figured they could sell to MGM CEO Jeff Bewkes, and it never got up the chain for him to see. Ironically, back in 2004 Time Warner contemplated buying MGM for nearly $4.8 billion, but backed out of a bidding war with a private equity group that Sony assembled. You have to think that someone at Time Warner must have been living right.

Now MGM is twisting in the wind. Its private equity owners have hired restructuring expert Stephen Cooper to restructure its $3.7 billion in debt. So far, he has won a reprieve from the banks, and might get them to extend their forbearance to February. But to do that, Cooper has to come up with a sellable business plan for a business whose prospects are fading. The studio will take a bath on its latest film, the musical Fame, and its library of 4,000 older films is aging and suffering as DVD sales tank.

Then again, Warner could still come back into the picture. It wouldn’t be the first time.

http://www.businessweek.com/innovate/Fi ... r_con.html

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Things are coming to a head. The truce foregoing interest payments (in exchange for conversion to equity) is only good until December 15th, but there have already been meetings - one on Nov 4th and another on the 6th. The creditors set up meetings to listen to Cooper's pitch and then to make their demands. They've played nice long enough it seems. The creditors preferred solution is that MGM find a buyer - now - and the private equity people, Sony, and Comcast can take their losses - along with the creditors. In this market ..... the price will be no where near enough to cover all the loans outstanding. Everybody is going to take big losses. It looks like it will be a single sale to one large buyer who will get all the assets and rights in one big package (that includes the DLM franchise).

MGM Creditors Press for an Auction
Posted by: Ron Grover on November 11

It may not be long before the troubled MGM studio is forced by its creditors to seek a buyer. That’s the word coming out of a Nov. 4 meeting between MGM CEO Stephen Cooper and the debt-hobbled film company’s 140-member creditor committee. According to one source with knowledge of the meeting, the creditor group turned thumbs down on a proposal by Cooper to convert the studio’s $3.7 billion debt into equity as part of a restructuring plan to keep the studio out of bankruptcy.

That's a lot of banks and others holding this debt - 140 !!!!

Taking equity in MGM seems dicey given that the studio’s current equity owners, which include several private equity firms, Sony(SNE)and Comcast(CMCSA), have already written down their investments from their $5 billion purchase of the studio in 2004. But Cooper, who has previously been brought in to help resurrect the fortunes of Krispy Kreme and Enron, wanted the creditors to allow him to raise as much as $1.2 billion in fresh debt to help jumpstart MGM’s film production. That prompted the debt holders, which could push the studio into bankruptcy, to press Cooper instead to seek a buyer. They made that demand at a Nov. 6 meeting.

It appears that on Nov 4th Cooper made his proposal for fresh new debt on top of the existing pile to the 140 creditors. They then had their own meetings to discuss and on Nov 6th they met with Cooper and told him 'No, but thanks for the offer'. And instead proposed what is basically a fire sale in this market. In other words they had a choice between 1) putting fresh money in (as they have already done several times before) in hopes that the global economy will recover enough soon enough to get their money (the growing pile of debt) back - either by repayment (very unlikely) or a sale to someone else (more likely, but still pretty out of touch with reality - still not likely), or 2) forcing a sale now and cutting their losses. It looks like they will force a sale and cut losses.

The creditors have great leverage over Cooper. In October, the committee gave MGM until Dec. 15 to forgo paying interest on the studio’s debt and to keep the company out of bankruptcy court. In return, however, the creditors insisted upon a major restructuring. Now, their patience seems to be wearing thin, according to a source with knowledge of the meeting. Cooper is said to have told the creditors that it’s unlikely he can get more than $1.5 billion for the studio, which is roughly what MGM’s rights to the James Bond franchise alone might be worth. An MGM spokeswoman would not comment.

Someone is going to get a great deal. Notice the Bond franchise alone might be worth $1.5 bil.

The creditors apparently are willing to take the haircut to be rid of the troublesome studio, according to the source. Among those who have been mentioned as potential candidates to buy MGM are studios Warner Brothers(TWX), Fox(NWS)and Lions Gate(LGF)and private equity fund Qualia Capital, whose principals Amir Malin and Ken Schapiro are industry veterans who have a successful record at turning around wobbly entertainment companies. The studios are said to be primarily interested in getting their hands on MGM’s 4,000-title film library, the Bond franchise and MGM’s rights (along with Warner) to make the Lord of the Rings prequel The Hobbit.

Other potentially interested buyers could be former News Corp. president Peter Chernin and one-time Yahoo CEO Terry Semel, a former Warner Brothers studio chairman. Neither man could be reached for comment.

In other words, someone is going to pick up the DLM franchise for almost nothing. This may be bad for Sony and the other equity holders, and bad for the creditors, but this is good for the DLM fans.

MGM can't finance any new DLM projects - no money. And even if they did their costs/expenses incurred so far for the TV series and the LAD: Movie probably exceed their revenues taken in. The series was prematurely cut short, so even with all the syndication and DVD sales it and the Movie are probably still under break even - just a guess.

Whoever picks up the franchise has several choices. They can sell it to someone more interested in developing it. They can sit on it and take in profits on DVD sales and syndication. Or they can start up a new project (TV series or another movie or a series of movies).

The 3rd choice will stimulate the sales of the series and LAD Movie in DVDs and syndication meaning that the costs of any new project will be more easily covered by revenues from the total franchise (not just the new project).

This could all happen very quickly. The leaks from the meetings sound like the patience of the creditors is gone. There are 140 which means once they've had a meeting and voted on a course of action, so there's not much flexibility for quick changes in direction. My guess is that the leaders for the 140 made it clear to Cooper that either he finds a buyer now or the creditors will do so after bankruptcy.

Let's hope the best for the people at MGM. This is all going to be very stressful for them. Hopefully, most will get picked up by the buyer.


http://www.businessweek.com/innovate/Fi ... s_p_1.html

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As of August 18, 2009, MGM ownership is as follows: Providence Equity Partners (29%), TPG (21%), Sony Corporation of America (20%), Comcast (20%), DLJ Merchant Banking Partners (7%) and Quadrangle Group (3%).

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4TH UPDATE: MGM Studio Claiming Business As Usual Despite Auction Preparation And Nervous Vendors
By NIKKI FINKE | Category: Uncategorized | Thursday November 12, 2009 @ 3:46pm


........

4:30 PM UPDATE & WRITETHRU: Considering all the lies that MGM Studios has told me and everyone else about its financial condition, it's amazing anyone even takes calls from that company seriously anymore. But expect to see a lot of unsettling news alerts about MGM from Deadline Hollywood and others in the next few days and weeks. Ron Grover's Business Week article that came out while I was ill is a good wrapup. (Variety's Peter Bart should have given him credit today but didn't, as usual.) But I can tell you not to believe MGM's claims that it's business as usual there despite the auction beginning. Because I'm receiving information that vendors with MGM are already extremely uncomfortable doing business with that studio, to the point that I've received word that outside workers are being told to stop what they're doing on at least one MGM film today -- and more are about to be told that for other MGM pics. That's because vendors don't think they're ever going to get paid.

The fact is this run-up to the MGM auction is going to make it hard for the studio to conduct business as usual because of it, especially when intensified by the bondholders' refusal to get realistic. As one of my film financing sources just told me by way of explanation about the committee charged with selling MGM, "They basically are saying, 'Make an offer on anything. The company, assets, whatever.' The bondholders aren't going to take it unless some huge offer comes in, and I don’t believe that’s going to happen. I would be very surprised if anything but offers that go nowhere happen." Which means weeks and probably months of uncertainty as the process drags on. No one's even begun to do due diligence yet, for crissakes. And all the while there'll be the dangling question in Hollywood and on Wall Street whether the studio will stay intact or be broken up?

That is tantamount to murder in moviemaking.

I'm told that MGM's Stephen Cooper, the specialist in restructuring companies who was brought in to clean up Harry Sloan's mess, is preparing non-disclosure agreements for all prospective buyers and those will go out in the next few days. Meanwhile, Moelis and Co is getting a data room with information together. Houlihan Lokey, who is advising the creditors committee, is expected to work closely with Moelis and Cooper on the M&A process.

I can forsee at least a rumor a day about possible buyers. So far, the only serious potential bidders are thought to be Time Warner, Fox, Lionsgate, and Qualia Capital LLC. The price tag for keeping the studio intact could range from a lowball of $1.5B to in excess of $2B. The thinking is this: Lionsgate may want MGM but it does not have the capital to do this deal because its market cap is only about $550 mil. So Lionsgate needs to find a partner, and it's talking to GTCR (a Chicago-based private equity fund) to do this together. But GTCR has a reputation as a tire kicker. Meanwhile, it's been rumored for seemingly forever that Warner Bros might be willing to pony up $2B, or bid just piecemeal for all of The Hobbit for example. And Fox, like Sony, primarily wants to get its hands on the James Bond franchise. But no bidder has a better handle right now of MGM numbers than Fox since it distributes MGM product on DVD on a worldwide basis and release theatrically internationally.

The expectation is that Warner, Fox, Lionsgate, and any other strategic would just liquidate MGM and keep the main assets. But Qualia Capital has been touted as the only potential bidder that would "save jobs" at MGM by keeping it as a going concern. Also, expect more prominent names beyond Peter Chernin's and Terry Semel's to surface. But I find it hard to imagine those guys writing huge checks out of their net worth to attract other potential investors/private equity firms to finance the transaction. The bids will be taken over the next two weeks for the assets or the company. When the auctions depends on when the bondholders accept reality. MORE

The bondholders will get, if necessary, pulled into a confrontation with reality when the the creditors/banks throw MGM into bankruptcy for nonpayment of anything due.

Let's hope that Qualia Capital comes out on top.

http://www.deadline.com/hollywood/repor ... m-studios/