A Twist in Sony’s Quest for MG

JULY 2, 2004

By Steve Rosenbush

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 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
() ).

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.

STOCK DEAL’S APPEAL. 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.

BIG OPENING. 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%.

CURRENCY EDGE. 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.

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