1. MGM debt holders object to fire-sale bids

    By Devin Zydel on 2010-03-26

    The Wall Street Journal – Delays are in store in the auction for Metro-Goldwyn-Mayer Inc., as hedge funds controlling big chunks of the studio’s bank debt signaled Wednesday an unwillingness to sell for a lowball price.

    Weighed down by a nearly $4 billion debt load, MGM asked its lenders to grant leniency on debt payments until mid-May as it continues to work on backup restructuring plans that would hand control to creditors, said people familiar with the matter. A forbearance on the studio’s debt is set to run out at the end of the month.

    The move—the fourth time in the past few months that MGM has asked for an extension on debt obligations—represents heightened brinksmanship among the studio’s creditors and suitors. Signaling their willingness to take control of MGM could be a move by creditors to inject more competition into the bidding process and fetch higher prices for the studio with the roaring lion logo.

    The lenders have become increasingly frustrated with MGM’s restructuring process, which has dragged on since November and yielded disappointing bids, according to people familiar with the matter. During a conference call Wednesday, some creditors had hoped to be given a choice between bids for the company or a separate plan that would give them control. Instead, they were told MGM continued to work on the separate plan with other creditors and that the film studio needed yet more time to get a deal done.

    MGM has received only three bids, all at roughly $1.5 billion or less, according to people familiar with the matter. Those making offers for the studio include Time Warner Inc., Lions Gate Entertainment Corp. and Len Blavatnik’s Access Industries. Creditors had been hoping for a figure of around $2 billion.

    MGM declined to comment.

    MGM has crafted a standalone plan in which creditors would convert debt to equity and likely seek a cash infusion from another investor to fund new film production, these people said. Any plan would likely be done through a streamlined bankruptcy process that received approval from many creditors in advance.

    MGM’s best asset is its film library, which boasts more than 4,000 titles and includes the James Bond and Pink Panther franchises. But the library’s cash flow has suffered amid a lack of new releases.

    Some creditors are hopeful that MGM’s latest release, Hot Tub Time Machine, could reinvigorate the library amid early positive buzz. The studio projects the film could take in more than its initial budgeted projections, a person familiar with the matter said. In addition, MGM has partnered with New Line Cinema for two separate Hobbit films, possible blockbuster pre-quels to The Lord of the Rings trilogy.

    Recent developments in the trading of MGM’s bank debt are driving the deal’s current dynamics. Over the past few months, several hedge funds have bought into the studio’s bank debt at around 60 cents on the dollar. Those investments imply the studio is worth about $2.4 billion, well above what current suitors are bidding.

    At least $1 billion of MGM’s bank debt is now held by a small group of hedge funds, said people familiar with the matter. Among the largest holders are Anchorage Advisors and Highland Capital Management, these people said. Apollo Global Management holds a small piece of MGM’s debt.

    Overall, about eight to 10 private investment firms now hold between $300 million and $400 million chunks of the studio’s debt, these people said.

    Many of these hedge funds sit on a steering committee that is negotiating with MGM and its advisers. The two camps met Tuesday to discuss MGM’s most recent bids and are set to convene again next week to continue discussing a standalone plan.

    “We are evaluating joining the steering committee,” said Patrick H. Daugherty, a partner and head of private equity at Highland, in a statement. “And we are certainly willing and able to consider a standalone plan that would provide a full recovery for our investors.”

    News Corp., the parent of 20th Century Fox and owner of The Wall Street Journal, offered to inject cash into MGM in exchange for an equity stake back in January but didn’t hear back, people familiar with the matter have said.

    MGM took on its large debt load in a 2005 buyout that handed the studio to private-equity firms Providence Equity Partners and TPG, as well as media companies Sony Corp. and Comcast Corp.

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