Sony, Two Buyout Firms May Acquire MGM for $5 Bln, People Say

April 22 2004

Sony, Two Buyout Firms May Acquire MGM for $5 Bln, People Say

April 21 (Bloomberg) — Sony Corp., the world’s second- biggest
consumer-electronics maker, and two buyout firms may buy film studio
Metro-Goldwyn-Mayer Inc. for $5 billion, people familiar with the
matter said.

Sony, Texas Pacific Group and Providence Equity Partners would invest
$1.5 billion cash and finance the rest of the transaction with debt,
the people said. Tokyo-based Sony already owns Sony Pictures
Entertainment, which includes the Columbia Pictures studio.

A sale would double the size of Sony’s film library to about 8,000
films, adding MGM titles including James Bond films. Sony would
augment its 85,000 hour-archive of television programs with 10,000
MGM TV episodes including “The Outer Limits.” By gaining those
assets, Sony also would acquire MGM’s cash flow, which an analyst
said may reach $150 million to $200 million this year.

“This is a good thing for Sony,” said Mark Greenberg, manager of
the $938 million Invesco Leisure Fund, which holds more than 750,000
MGM shares. “The value of MGM is it’s the largest post-World War II
library in Hollywood. It’s logical.”

MGM issued a statement saying it’s still proposing that its board
approve plans for a one-time dividend of $8 per share.

A purchase would mark the third time billionaire Kirk Kerkorian, who
controls 74 percent of MGM, has sold the studio. Kerkorian tried
unsuccessfully to merge his studio with Sony Pictures in 2001.

Price Tag

A $5 billion price tag implies a cost per share of $21, Lehman
Brothers analyst Anthony DiClemente said in an interview. They closed
at $17.65 on Tuesday, the day before news of the talks became public.

“Our view is that fair value is $19 a share, said DiClemente, who
rates the shares “equal weight” and doesn’t own them. “If Kirk
gets $21, in our view, that would be a Hollywood ending for MGM.”

MGM shares rose $2.10, or 12 percent, to a 52-week high of $19.75 in
New York Stock Exchange composite trading today after Reuters
reported that MGM was in talks with Sony. The shares have gained 16
percent this year.

Andrew Cole, a Providence spokesman, and Owen Blicksilver, a Texas
Pacific Group spokesman, declined to comment. MGM spokesman David
Bloom also declined to comment.

“It’s our policy not to comment on rumors,” said Kei Sakaguchi, a
spokesman for Sony in Tokyo.


Large media companies are acquiring assets to gain content such as
films, and the means to distribute them. Rupert Murdoch’s News Corp.
in December paid $6.6 billion for a controlling interest in the
DirecTV satellite television service to gain a share of the U.S.
pay-television market.

General Electric Co.’s NBC said yesterday that the U.S. Federal Trade
Commission approved its planned $14 billion purchase of Vivendi
Universal SA’s U.S. entertainment assets.

MGM last year had a loss of $161.8 million on sales of $1.88 billion.
MGM will announce first-quarter financial results next week on April

For the year ended March 31, Sony earned $813 million (88 billion
yen) from sales of $68.5 billion. Operating income at Sony’s film
business dropped 82 percent to 5.6 billion yen in the quarter ended
Dec. 31, the most recent period for which figures are available,
because of a lack of hit titles.

Sony Pictures, in Culver City, California, already owns the former
Columbia and TriStar studios. Led by Chairman and Chief Executive
Michael Lynton, it has produced movies “Hellboy” and “50 First
Dates” this year, putting it in second place in box- office sales
with $372.5 million.

Newmarket Films, the distributor of “The Passion of the Christ,” is
No. 1 with ticket sales of $394.6 million.

MGM, founded in 1924, owns the “Rocky” and “Pink Panther” films,
19 Woody Allen films, as well as “West Side Story” and “Rain

“There’s not much else out there that has a positive free cash flow
like MGM does,” DiClemente said.

Leveraged Buyout

Kerkorian’s company doesn’t own a traditional Hollywood studio lot,
and instead rents studio space and sound stages. The company has a
long-term lease for the MGM Tower in Century City, about 10 miles
west of downtown Los Angeles. The company has a facility in Santa
Monica where it houses the home entertainment unit.

In a leveraged buyout, a firm acquires a company using investor cash
in combination with debt taken out on the acquired company’s books.
The buyout firm then tries to pay down the debt and sell the company
at a profit in three to five years.

Texas Pacific, started in 1993 by David Bonderman, a former aide to
the billionaire Bass family of Texas, raised a $5.3 billion takeover
fund last year, TPG Partners IV LP.

The firm has a history of investing in brand names in need of
resuscitation, including loss-ridden airlines such as Continental
Airlines Inc. and burger chain Burger King.


Providence Equity, named for the Rhode Island city where it is based,
invests in communications and media companies and was started in
1991. The firm is currently investing its $2.8 billion Providence
Equity Partners IV.

Providence almost doubled its money on a stake in Irish telephone
company Eircom Ltd. after an initial public offering this year. Other
stakes include cable channel Yankees Entertainment and Sports Network

Buyout firms increased their purchases 25 percent to a record $127
billion worldwide in 2003 as they used more than $100 billion of
uninvested capital in combination with the lowest interest rates in
40 years to make purchases from corporations shedding divisions.

Such purchases have continued this year, with Kohlberg Kravis Roberts
& Co. yesterday announcing plans to buy satellite broadcast company
PanAmSat Corp. for $4.3 billion from Murdoch’s DirecTV Group Inc.


Kerkorian is the president and chief executive of closely held Las
Vegas-based Tracinda Corp. and is ranked as the 65th wealthiest
person with $6 billion in net worth, according to Forbes magazine.

The son of an Armenian immigrant rancher in California’s San Joaquin
Valley, Kerkorian has owned the MGM film studio three times since he
first bought it in 1970. Under Kerkorian, the company built the MGM
Grand Hotel in Las Vegas in 1973. The casino unit was spun off into a
separate company in 1980.

Kerkorian sold the studio to Ted Turner in 1986 and then bought it
back, leaving the pre-1948 library with Turner. Kerkorian later sold
the part of the studio he retained to Italian financier Giancarlo
Parretti, who lost it to Credit Lyonnais after defaulting on bank

Kerkorian bought it a third time in 1996 with MGM Inc. Chairman Frank
Mancuso for $1.3 billion in cash, outbidding the Dutch entertainment
company PolyGram NV.

To contact the reporters on this story:
Dan Lonkevich in New York at [email protected]; Michael White
in Los Angeles at [email protected].

To contact the editor of this story:
Greg Baumann at [email protected].