MGM Seeks Capital 'Enhancements'

The studio is arranging a $500 million line of credit to make some franchise films, but it appears to want even more for its turnaround effort

Editor's Note: An earlier version of this article incorrectly attributed a newspaper's source for data on MGM's fiscal year loss. This version also adds information on the company's cash flow.

Sometimes you have to ponder what a company means when it issues a press release. Take the Aug. 25 release stating that legendary studio Metro-Goldwyn-Mayer "is not for sale." That puts to rest the Wall Street buzz that has circulated for the past few days, which reported on Aug. 22. Or does it? MGM, which also said there is "no asking price" for the company, says it has hired investment banking firm Goldman Sachs (GS) to "explore enhancements to MGM's long-term capital structure."

What does that mean? The company says its existing financing arrangements—it has $3.7 billion in debt from its 2004 acquisition by a consortium headed by Sony (SNE)—are sufficient to meet its needs. Still, it wants to enhance its capital. Take your pick: It could look for another investor to share the load with its current owners, which include Providence Equity Partners, TPG, and cable giant Comcast (CMCSA), in addition to Sony. It could decide to sell shares to the public or restructure its debt, which is said to be costing the company some $300 million in annual interest payments. The company lost $400 million in the fiscal year that ended in March, according to The New York Times (NYT), which says it reviewed company documents. On a cash-flow basis, MGM's losses are declining and came in under $100 million for the fiscal year, according to a knowledgeable source. And if a potential buyer came down the pike…

These are not easy choices. An IPO seems out of the question for a money-losing company. Maybe there is fresh money available to the partners, but hefty debt payments and losses don't usually bring new partners running. As for more debt? Credit is tight, we hear.

Maybe that means the partners continue to soldier on. They're "pleased with the company's current momentum and are committed to the future growth of the studio," they say. That may mean they are in for the long haul—or not—but it clearly is a vote of confidence in the direction that is being plotted by Sloan, who has successfully created and sold companies in the past, making a boatload of money in 2005 when he sold European TV giant SBS Broadcasting for $2.5 billion to a pair of private equity firms. He joined MGM in October 2005, buying in as a shareholder, with the expectations of creating value that MGM investors can reap as well somewhere down the road.

Turning Around MGM?

So give Sloan credit. He has been hustling to generate revenue from MGM's 4,100-title library, which owns the likes of the Rocky, Pink Panther, and James Bond flicks. He's created several new cable channels, beefing up the MGM Channel's 30-odd foreign territories with deals in Italy and another for wireless-phone giant Vodafone (VOD). He is creating a video-on-demand channel for action films with Comcast and is allied with Paramount Pictures (VIA) and Lionsgate in the difficult chore of creating their own premium movie channels. MGM also jump-started its TV division, and has remade the American Gladiators show into a hit for NBC (GE).

Its film unit, after slogging through some failures and parting ways with the head of its United Artists unit, is trying to become a major power in Hollywood again. Sloan pulled off a coup when he lured Mary Parent, former Universal production chief, to head MGM's film unit. Parent got off to a quick start, signing Denzel Washington to star in a film based on the Robert Ludlum thriller The Matarese Circle. The studio also won the rights to jointly produce The Hobbit, a prequel to The Lord of the Rings franchise, when Sloan helped broker a deal between producer Peter Jackson and New Line Cinema.

So why does MGM need to "explore enhancements" to its long-term capital structure when it has those and other prospects lined up? The easy answer—and MGM and its partners aren't talking—is that, given the current financial situation, its investors have gotten tired of seeing more money going out than coming in on such a massive investment. Clearly, the partners would love to see someone else's cash cover some of those interest payments. Sloan & Co. are in the process now of arranging a $500 million line of credit to make some of their franchise films, but they seem to need more. Maybe Sloan turns around MGM. But rising debt payments and the inherently chancy nature of Hollywood clearly are not an easy fit, even for risk-taking private equity funds. As the deep pockets have learned, playing in Hollywood isn't easy.

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