Profit motive stalls MGM sale

News Corp., Disney eyeing Lion

NEW YORK — Metro-Goldwyn-Mayer’s majority shareholder Kirk Kerkorian is looking for a buyer for the Lion, but one big obstacle stands in the way of a deal: MGM’s weak stock price. Kerkorian would lose several hundred million dollars if he sold now, and that makes a deal very unlikely, according to observers.

Nevertheless, Walt Disney Co. and News Corp. have in recent weeks begun preliminary due diligence work on MGM, several sources said Thursday, as a result of an approach from Kerkorian’s main adviser, Jerry York.

Other approaches, to Time Warner and CBS, have elicited no interest. And neither News Corp. nor Disney is likely to pay a price high enough to prompt Kerkorian to sell, Wall Streeters said.

MGM first disclosed its consideration of merger talks in a Securities and Exchange Commission filing late Wednesday (Daily Variety, Aug. 6) and it embellished those comments with a statement Thursday that said it had “entered into informal discussions with unidentified companies regarding possible business combinations.”

The disclosure prompted MGM’s stock price to rise 81¢ to $17.93 Thursday, but that is still 25% below the $24 a share Kerkorian paid for his 65% shareholding, meaning he is carrying a $261 million loss on his investment. People close to him said Kerkorian would only sell at a profit.

And given that both Disney and News Corp. were bidders for MGM when Kerkorian bought it in 1996, it is inconceivable either would buy him out now at a higher price than he paid or than the market is trading.

A Fox spokeswoman said, “Officially, we are not in conversations.” A Disney spokesman said, “We have no comment on that entire subject.”

One high-level insider said MGM has approached CBS about a potential “larger relationship,” but the Eye web wasn’t interested.

“We said, ‘Why? What do you have? A library with some old movies.’ There was really nothing there. They are seeking partners without much to offer,” the insider added.

MGM’s library of movies may be more valuable to a company with extensive general interest cable networks or worldwide satellite platforms, such as Time Warner — which owns TNT and TBS — or News Corp.

Time Warner was approached and looked at MGM but is unlikely to pursue a deal, sources close to TW said.

Disclosure of the talks will hobble MGM’s efforts to shore up its finances, bankers say, as the Lion won’t be able to go into the lending market while there is uncertainty about its ownership.

Probably with that in mind, MGM chief financial officer Dan Taylor discounted the significance of the statements in the SEC filing when he met privately with Wall Streeters on Thursday. Taylor denied any sale talks were under way, some sources said, and urged people not to give too much weight to the statements in the filing.

Taylor, who was in New York for a round of meetings to market a $250 million upcoming stock offering for MGM, joined MGM from Kerkorian’s private holding company Tracinda and would therefore presumably know about Kerkorian’s agenda.

What is puzzling, however, to both outsiders and insiders, is the timing of Kerkorian’s approaches. Last week MGM announced the $250 million offering, which will be at least 90% covered by Kerkorian.

MGM is making some efforts to sell the remaining 10% to the public, however, but news that Kerkorian may be selling the company is sure to raise question marks for investors.

More important, MGM chairman Frank Mancuso has not had time to implement his business plan. The Lion is raising the extra money in part because it has increased television production more than it expected, and because some of its pics this year have performed poorly.

The timing is “bizarre,” said one Wall Streeter Thursday.

Kerkorian’s reps did not return calls seeking comment.

Kerkorian’s approaches do coincide with a financial crunch that has suddenly hit MGM, prompting the Lion to freeze television development and reduce the number of pics it plans to release every year.

Kerkorian has put a lot of money into the Lion and the need to put another $250 million in may be as much as he is willing to commit, some observers speculate.

(Jenny Hontz and Chris Petrikin in Los Angeles contributed to this report.)

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