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MGM’s Poly ploy

Lion eyes PFE bid; EMI confirms interest

Is Kirk Kerkorian getting out — or getting in deeper?

It’s hard to tell, given the news Monday that his Metro-Goldwyn-Mayer is considering a bid for Polygram Filmed Entertainment, a move that would light a fire underneath the auction of the film studio.

Such a bid would be an extraordinary turnaround in MGM owner Kerkorian’s strategy for the Lion: from one of exit to one of expansion. PFE is expected to sell for between $600 million and $1 billion. (For more on Kerkorian’s efforts to limit his holdings in MGM, story, page 29)

Kerkorian faces big competitors in the race for PFE, however. U.K. music giant EMI publicly confirmed Monday it was considering a bid for PFE.

From the start, EMI has been perceived as an outside bidder, but insiders said Monday that its interest in Polygram is growing.

Aside from EMI, Kerkorian would be competing with Canal Plus, Carlton Communications and two smaller U.S. companies, Lakeshore Entertainment and Artisan Entertainment, which is backed by Bain Capital. An investment group led by former NBC exec Neil Braun is believed to have dropped out.

Industry observers believe Canal Plus and EMI have the strongest chances of success, at least until MGM puts its bid on the table. However, Canal Plus has declared that it is more likely to make a bid in concert with another company, while EMI or MGM have the resources to buy PFE outright. An outright sale of PFE is a scenario more pleasing to both PFE management and to Seagram Co., which is selling the studio.

Coming soon

People close to the situation said Monday that MGM had not lodged a bid for Polygram yet, but that one would be made shortly. Execs from the Lion have been reviewing an information book on Polygram prepared by its investment banker, Goldman Sachs.

Since PFE was put on the market in May, MGM has dismissed out of hand any notion of going after the company. The main opposition came from MGM’s 25% shareholder Seven Network, which was under pressure at least partly because of the debt it took on to pay for the investment in the Lion.

But Seven agreed to sell its stake to Kerkorian last week, clearing the way for Kerkorian to change his strategy. MGM immediately doubled the size of a planned stock offering to $500 million and is now looking intently at Polygram.

People close to the situation say MGM is interested both in Polygram’s library and its distribution system. PFE has poured a lot of money into an international distribution system, which would have big cost advantages for the Lion.

Of course, MGM is a partner in international distrib consortium United Intl. Pictures. However, the Lion’s commitment to UIP is renewable on a 12-month basis, which theoretically could free it up to adopt PFE’s international network in a bearable time frame.

And Polygram’s library would add 1,500 films to MGM’s existing 4,000-title catalog, creating an even bigger stash, useful for MGM’s ongoing efforts to create a branded distribution network in both film and television across the world.

MGM was a bidder for the CDR library, which PFE acquired last year. That catalog accounts for two-thirds of Polygram’s library, so MGM’s interest is not surprising. Polygram paid a lot more than MGM was willing to for CDR, so price will likely be a crucial issue.

Ironic circumstance

A bid by MGM for PFE would be ironic, as Polygram was one of the bidders for MGM two years ago.

MGM faces some hurdles getting to the finishing line this time. Buying Polygram would only aggravate the Lion’s cash requirements, as PFE is not yet profitable, and it would not solve the Lion’s need for getting a broadcasting or cable distribution partner.

Emergence of MGM’s interest comes as due diligence for most bidders is getting into its final stages. Most of the bidders have received management presentations from PFE execs and are now studying PFE’s accounts in data rooms set up in New York and Los Angeles, with final bids due Sept. 11.

People close to the situation said that whoever buys PFE will need to have considerable financial resources, not only to pay the required price, but also to invest the capital needed to keep the company’s film production going.

Strategic need

Some said there are perceptions among bidders that Seagram and Goldman Sachs believe EMI will pay the highest price because the music company is seen as having a strategic need to add a film arm. EMI clearly also has greater financial resources than most other bidders.

It is not clear how serious EMI is, and some observers say there are as many reasons why the music giant would not make a bid as support an offer. In its statement confirming its interest Monday, EMI said it “regularly reviews acquisition opportunities and confirms that it is one of a number of parties considering the possible acquisition of PFE.

“EMI is still in the early stages of assessing this opportunity, and a further announcement will be made if appropriate.”

One insider said the music major would “go it alone” and was “interested in looking at the entire package” of PFE, meaning all three parts of the business: film production and distribution, the film library and the video operation.

MGM declined to comment.

(Erich Boehm in London contributed to this story.)

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