Bids Due Friday Could Help Free MGM From Debt

Time Warner Inc. and Lions Gate Entertainment Corp. are among the likely bidders to rescue the famed yet perennially troubled Metro-Goldwyn-Mayer Inc., the studio whose lion roars before every movie.

The eventual winner would gain the right to make new James Bond movies, win half of the rights to the next two "Lord of the Rings" movies based on "The Hobbit" and snatch the studio from a possible bankruptcy filing. Nonbinding bids are due Friday.

A sale would be another win for Stephen Cooper, a restructuring expert who joined the company in August after stints reorganizing Krispy Kreme Doughnuts Inc. and Enron Corp. It would also mark the latest change in ownership for a company that has been bought and sold countless times since it was founded in 1924.

It could also refocus the studio known for such classics as "The Wizard of Oz" and "Gone With the Wind" on making movies again. Last year, when MGM cut a deal to stop making interest payments as its financial troubles loomed, it made just one movie, a remake of the 1980 musical "Fame" that did middling business in theaters.

The latest ownership change took place in 2005, when a consortium of private equity groups plus Sony Corp. and Comcast Corp. bought MGM for $5 billion from a group including billionaire Kirk Kerkorian — his third sale of the studio.

At the time, the private equity buyers, including Providence Equity Partners and Texas Pacific Group, were flush with cash and had easy access to credit, allowing investors to heavily borrow to complete the purchase. Comcast sought movies for its cable channels. Sony wanted to make new James Bond and Pink Panther movies and to create another supporter for its Blu-ray high-definition video format.

Although MGM got plenty of licensing fees and revenue from a library that includes 4,000 movie and TV titles, including such classics as "West Side Story" and "Rocky," the studio failed to create a major new hit.

Once credit markets froze and DVD sales slowed, producing new movies and making interest payments became more difficult. With less money coming in for increasingly stale titles, the value of its library took a dive.

"The library is a little fished out," said James Dix, an equity analyst at Wedbush Morgan. "As they get older, they're not getting more valuable."

Now, about 140 creditors, led by JP Morgan Chase, stand to forfeit much of the $4 billion they lent to buy the studio, even after they agreed to forgo interest payments since October while a deal is worked out. Representatives of JP Morgan Chase didn't return messages seeking comment.

About a dozen companies — studio owners and investment banks — have signed nondisclosure agreements for a closer look at MGM's finances as they weighed a possible bid. They include Lions Gate, "Twilight" franchise owner Summit Entertainment and Warner Bros. parent Time Warner Inc.

Twentieth Century Fox owner News Corp. has expressed interest and this week was working with MGM on a different nondisclosure agreement that it hoped would be less restrictive. Fox already distributes MGM movies on home video.

Time Warner is expected to make a bid because its movie division already owns the other half of "The Hobbit" and the entire "Lord of the Rings" trilogy. Time Warner also has a huge library of movies of its own.

The company has bid for MGM in the past, and Turner Broadcasting System bought and sold a portion of MGM in 1986, before Time Warner acquired Turner a decade later.

Movies that MGM made before 1986, including "The Wizard of Oz" and "Gone With the Wind," remain under Turner's ownership and form the backbone of Time Warner's Turner Classic Movies cable channel.

It's unclear what MGM is worth now, but in October, a credit default swap auction determined each dollar the company owed was worth just 58.5 cents — valuing it at around $2.36 billion. That auction was held to determine how much insurers were required to pay when MGM technically defaulted on its loans by delaying interest payments, under a deal with creditors that lasts through Jan. 31.

The equity investors wrote off their stakes long ago, meaning their $1.6 billion investment has already vanished.

After bids come in Friday, financial adviser Moelis & Co. will recommend whether to have a second round of bidding or have MGM attempt to restructure its debt on its own. The bids are nonbinding and meant to help determine the studio's value. A bankruptcy filing remains possible if the bids are too low, the sale process fails or creditors don't agree to forgive some debt.

"We find it unlikely that MGM's creditors would cleanly agree to a sale price materially below $2 billion," wrote analyst Anthony DiClemente of Barclays Capital in a research note Wednesday. If creditors aren't satisfied, he wrote, "the studio would likely file for bankruptcy and try to sell itself while in Chapter 11 proceedings."