A Twist in Sony's Quest for MGM

While it lines up financing partners for the bid, Time Warner has jumped in with an offer that could prove far more attractive

By Steve Rosenbush

For a while, it appeared that Sony (SNE ) was close to adding the vaunted MGM (MGM ) movie studio to its impressive stable of film properties, which already includes Columbia and TriStar Pictures. Sony's U.S. unit, run by former CBS news chief Howard Stringer, has been deep in negotiations with MGM for about two months, people close to the talks say. And Sony had lined up several investors to back up its $5 billion bid (see BW, 7/12/04, "Imagine Sony on Steroids").

Then came Time Warner (TWX ). New disclosures that the media and entertainment giant submitted a rival bid of about $4.7 billion a week or so ago (first reported on June 29 by the Wall Street Journal Online) have suddenly thrown prospects for a MGM-Sony deal into doubt, people close to the negotiations say.


  It's too early to say for sure who'll win the contest. Negotiations are expected to continue for several more weeks, and reports are circulating of a possible third suitor, such as General Electric's (GE ) NBC unit. But the Time Warner bid could be formidable. Why? The media empire is returning to fighting form after its painful merger with Internet service AOL. And it has some powerful advantages as it steps into the ring with Sony.

Time Warner's biggest strength may be its ability to pay for most of the deal in stock. The company took a beating after it merged with AOL. But investor Kirk Kerkorian, who owns 74% of MGM, believes that Time Warner Chief Executive Richard Parsons is close to pulling off a turnaround, one person close to MGM says (see BW Online, 7/1/04, "America Online Gets Clicking").

That's why he's willing to sell his stake in MGM to Time Warner for $11.50 a share -- as long as Time Warner pays that part of the price in stock. Kerkorian would profit from any appreciation in the stock, while avoiding big tax liabilities associated with an all-cash transaction. Time Warner would, however, purchase the remaining 26% of MGM, which is publicly held, for $13 a share in cash.


  Sony, which is having a tough time in the consumer-electronics business, couldn't afford the deal on its own. It has arranged backing from investment bank Credit Suisse First Boston and private-equity players Providence Equity Partners and Texas Pacific Group. Not only has it found investors willing to share the expense, but it would structure the deal so MGM's $1.9 billion in debt wouldn't appear on Sony's balance sheet. Together, they're offering $13 a share in cash for MGM.

Help from Sony's partners complicates the deal, though. As a long-term strategic investor, Sony's interests aren't fully aligned with those of its partners, who want an exit plan in place before they close the deal. Even as Sony negotiates with MGM, it's conducting talks on a parallel track with its own team. Providence and Texas Pacific want to make sure that Sony will buy them out in a few years -- and at a good price. But putting a value on the combined film units is difficult and subject to disagreement, people familiar with the matter say. That's the main reason why Sony's bid for MGM has been dragging on for weeks.

That internal wrangling has given Time Warner a huge opening. And no question, Parsons & Co. would love to have MGM, which includes the world's largest library of color films. If Time Warner's 4,500 films and MGM's 4,500 were combined, they would constitute 45% of the Hollywood movie-library market. That's even bigger than a Sony-MGM combination, which would control 40%.


  The MGM collection also includes some of the most popular titles of all time, including James Bond. That could almost guarantee a steady stream of cash for years to come. MGM has also mastered the art of producing popular movies, like Barbershop and DeLovely, on relatively low budgets. They would supplement big-bet blockbusters like Time Warner's Harry Potter series.

Even the currency market is working in Time Warner's favor. While the value of Time Warner shares are on the rise, the cheap dollar makes Sony's hard currency somewhat less enticing.

It's way too early to count Sony out. Differences with its partners, however complex, can be overcome. And people familiar with the negotiations say the parties have been making progress after weeks of talks. They better resolve those differences quickly, though. The Sony-MGM deal no longer seems like such a sure thing.

Rosenbush is a reporter for BusinessWeek Online in New York

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