Merrill leads Lion

Despite Street concerns, MGM set on IPO

NEW YORK — Metro-Goldwyn-Mayer Inc. confirmed Tuesday it was moving ahead with an initial public stock offering, although disagreement on Wall Street about the timing of the offering meant the Lion couldn’t hire the bank it wanted to lead it.

MGM advised Wall Street giant Merrill Lynch on Monday that it would be the lead manager of the offering, alongside the studio’s financial adviser, J.P. Morgan. Since Morgan isn’t known for its strength in underwriting stock offerings, Merrill’s role is the key one.

Sources say MGM’s top choice for the slot was Goldman Sachs, but Goldman advised the studio to wait a year or two. At least one other major bank also advised the studio to wait, to build up a track record of successful film releases before trying to go public.

In the end, MGM hired Merrill because the firm ranks alongside Goldman as a top bank in arranging public offerings, and the studio wanted one or the other. At least two other investment banks are expected to be hired as co-managers, likely to be picked from a group of four: Furman Selz, Cowen & Co., UBS Securities and Deutsche Morgan Grenfell.

Goldman execs did not return calls and an MGM spokesman declined to comment, but people close to MGM confirmed this account. For legal reasons, the identity of the underwriters was not disclosed by MGM Tuesday when it announced the offering plans in a brief statement.

MGM gave no details about the offering, other than saying that no shares would be sold by the two shareholders, Kirk Kerkorian and Seven Network. Further details will come when MGM files its prospectus with the SEC in several weeks.

Goldman’s advice to MGM is believed to be partly based on the firm’s belief that the stock market is too high, although it likely also reflects a widespread view about the poor performance of most film stocks. In recent years, every independent film stock except one — New Line Cinema — has ended badly, such as Carolco Pictures’ bankruptcy filing, Savoy Pictures’ low-priced sale to HSN Inc. or Cinergi Pictures Entertainment’s liquidation.

In MGM’s case, the studio will be going public before it has released its first major picture since its acquisition by Kerkorian and Seven. The offering is likely to be priced shortly before the new James Bond picture is released in December, to ensure the stock is sold on the hype about the picture.

MGM execs are clearly aware of the dangers in going public early. But MGM chairman Frank Mancuso has been keen to go public as soon as possible, to help the studio do acquisitions using stock, to enhance management compensation packages and also, some Wall Streeters say, to dilute the influence of Kerkorian and Seven chairman Kerry Stokes.

While $200 million to $300 million will likely be raised in the offering, cash is not the objective. Bankers told the studio it could raise a lot more, but that would mean diluting Kerkorian and Seven more than the two wanted.

The studio is likely to be valued in the offering at only around $2 billion, barely more than what Kerkorian and Seven paid for MGM and the recently acquired Orion Pictures. Bankers say, however, that with no track record to speak of, MGM can’t try to get a big price in the offering.

MGM chief financial officer Michael Corrigan told bankers in meetings over the past few weeks that he knew an early offering would mean the company wouldn’t get the price it is potentially worth. As a result, he said, the studio wanted to sell the minimum amount of stock it needed to ensure enough trading liquidity after the offering.

This route is one suggested by several bankers. The hope is that if MGM performs well at the box office, it could raise more money at a higher price later on.

In the meantime, other financing options are also being pursued. Two other investment banks, possibly Donaldson Lufkin Jenrette and Bear Stearns, are expected to be hired in coming weeks to lead an offering of high-yield securities. Meanwhile, another bank is studying the possibility of raising off-balance sheet financing for film production, although this is much less straightforward than the equity and debt offerings.

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