By Steve Rosenbush Just a few days ago, it appeared that Time Warner (TWX) was near an upset victory in the bidding war for famed movie studio MGM (MGM), which owns the world's biggest film library. After months of negotiations, rival bidder Sony (SNE) was still mired in talks with its own financial backers.
Sony had been first on the scene with an offer of $4.8 billion. But the deal was so complicated -- in part because of multiple investors and partners -- that Time Warner seemed to have the edge with a bid valued at $4.6 billion in stock. The thinking was that financier Kirk Kerkorian, who controls 74% of MGM, would accept Time Warner's lower offer because the tax bite would have been smaller and because he thought Time Warner stock was due for a rebound under CEO Richard Parsons (see BW Online, 9/7/04, "Kerkorian: Say Goodbye to Hollywood").
But the tables were turned on Sept. 13 as Time Warner abruptly walked away from the auction. And indeed, Sony won the MGM prize with a bid valued at $4.9 billion -- about the price it had previously offered.
MORE PRUDENT MOVE? "Although MGM is a valuable asset, we have decided to withdraw our bid," Time Warner said in a statement attributed to Parsons. "Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity. We're confident that there are other capital-allocation choices that will enable us to continue to build shareholder value."
Why did Time Warner walk away? Still recovering from its disastrous sale to Internet giant AOL, the outfit repeated in its statement that it's adhering to a new-found mantra of approaching each acquisition with strict financial discipline. And it may simply see buying part of bankrupt cable-TV operator Adelphia Communications as a more prudent use of its financial muscle. The auction for Adelphia's assets is just getting under way, and Time Warner is a likely bidder for systems in Los Angeles, Buffalo, Western Pennsylvania, and Ohio.
Time Warner's departure cleared the way for Sony to snatch the studio. MGM will provide a new source of cash for the Japanese giant, which is struggling with weak fundamentals in the consumer-electronics business. The MGM film library, which includes the James Bond, Rocky, and Pink Panther titles, will generate sales from pay-per-view video and DVD. And the combination of Sony's 4,000-title film library with MGM's 4,500-film library will give Sony control of 40% of the home-viewing movie market.
MURKY EXIT PLAN. This is the second time in two years Time Warner has walked away from a potential acquisition of MGM. When the studio started the latest round of talks, the price was expected to be somewhere in the $3 billion range, according to one executive, but the auction process pushed the price higher.
Sony justified the higher price because it's essentially acquiring MGM with other peoples' money. Investors include Credit Suisse First Boston and private equity firms Texas Pacific and Providence Equity Partners. Comcast (CMCSA) has been invited by Sony to make a minority investment in MGM and is mulling the offer, according to a person familiar with the matter.
The deal may yet pose a challenge for Sony and its partners, however. Private-equity firms typically like to have an exit plan drawn up before they enter a transaction. But it's unclear who, if anyone other than Sony, might want to buy the MGM property three or four years down the road.
RESALE WRANGLE? The Sony group bid values MGM at a relatively high level. To realize the value of its investment, Sony must carefully integrate MGM into Sony Pictures. But the tighter the studios are integrated, the more difficult it will be to value the property for resale. Assuming that Sony ultimately wants to take sole control, it could be locked in complicated talks with its financial backers over MGM's value for many years to come.
On its own, MGM has never lived up to owner Kerkorian's hopes. If the MGM-Sony combination turns out to be a success, it will be impossible to know how much of the credit should go to MGM and how much to Sony. That could make it very difficult for Sony's partners to sell control of MGM to Sony at a premium. Yet another installment could unfold in the long-running drama of selling MGM. Rosenbush is a senior writer for BusinessWeek Online in New York