Lion cuts back on offering

PO cut to $193 mil

NEW YORK — Metro-Goldwyn-Mayer Inc. cut the size of its public stock offering by a little less than one-third Monday to $193 million, two days before the deal goes to market, in a sign that the Lion wasn’t going to be able to sell all the stock it hoped at the price it wanted.

The move appears to be an acknowledgment that the offering is encountering some resistance from investors, Wall Streeters said, a result of investors’ wariness of film production companies generally and uncertainty about MGM’s prospects specifically.

MGM will still raise as much new equity as it was hoping because MGM’s controlling shareholder, Kirk Kerkorian’s Tracinda Inc., agreed to make up the shortfall by buying $75 million worth of stock. That takes his total investment in MGM to $946 million and he will now own 61% of MGM’s stock after the offering rather than 55% as earlier planned.

MGM had planned to sell 12.5 million shares to the public, but now will sell only 9 million shares, or 13% of the total stock outstanding. (Seven Network of Australia owns about 25% while management has the remaining stock).

Assuming the offering is priced at $21.50 a share, about where MGM is hoping it will be, Kerkorian would be buying 3.6 million shares. If the offering is priced higher, Kerkorian will reduce the number of shares he buys but keep the cash commitment at $75 million.

“He sees this as an opportunity to buy more shares and increase his position,” said a spokesman for MGM, declining to comment further. People close to the Lion say, however, that the studio hopes the move will ensure that the stock to be sold to the public now will be priced higher.

The risk for MGM, sources close to the situation conceded, is that investors may interpret the cutback as confirmation that the offering was having problems, and that may reduce demand even further. On the other hand, MGM’s backers argue that Kerkorian is showing his faith in the company’s future by investing more money in it, an argument that could carry weight with some investors.

Kerkorian’s partner in buying MGM last year, Seven Network of Australia, declined an offer to participate with Kerkorian in buying more stock, sources said.

People close to the deal say the decision to reduce the offering follows advice from Merrill Lynch, the lead underwriter, that it did not think it could sell all the stock at the high end of the pricing range based on the reaction it was getting from institutional investors.

As is common in all stock offerings, MGM chairman Frank Mancuso has led a “roadshow” tour of U.S. institutional investors in the past two weeks, explaining his plan for the studio’s future. That tour moved to Europe over the weekend but returns to New York tonight. The offering is due to price Wednesday.

Underwriters in stock offerings typically feel out the mood of the market in the days leading up to the pricing of a stock offering, contacting investors after they have sat through roadshow presentations to get their reaction.

Wall Streeters close to the deal say investors have fallen into two camps on the MGM offering: Either they’re not interested in buying MGM stock at any price, or they like the idea but objected to the price.

Some media money managers argue that the offering was not attractive because MGM’s business was too reliant on film production, although people close to the studio say most of its earnings will come from its film library, which is more reliable than new releases.

At the same time, many investors thought the price was too high, even though it was lower on a per-share basis than the price paid by Kerkorian and Seven Network when they bought the studio last year.

Wall Street analysts debated Monday whether reducing the size of the offering would help MGM sell the remaining stock at the original pricing range. “It’s supply and demand” said one, noting that there may be enough investors willing to buy 9 million shares at a higher price but not enough to buy 12.5 million shares.

But one analyst said that if investors did not like the valuation, reducing the number of shares to be sold won’t have any impact because value is determined on a per-share basis.

MGM has encountered plenty of problems selling the offering. There was a lot of debate on Wall Street about whether Kerkorian and Seven Network should build up a track record for their ownership before trying to take the company public.

Divisions were highlighted when Goldman Sachs pulled out as an underwriter of the deal, in disagreement over the pricing, sources said. And in the past few weeks, MGM has had to deal with Sony announcing plans to make James Bond movies, a dispute with Warner Bros. over video distribution rights on MGM’s Orion Pictures subsidiary and a lawsuit from Samuel Goldwyn Jr., whose company is now owned by MGM.

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