Lion’s cash dash

$500 mil Cablevision deal buoys Viv U bid

MGM said Monday it’s selling its stakes in three cable webs back to Cablevision for $500 million, a move that could buttress the Lion’s bid for Vivendi Universal Entertainment.

Lion strengthens its dealmaking ability by selling its 20% interests in three of Cablevision’s Rainbow Media channels — American Movie Classics, Independent Film Channel and WE: Women’s Entertainment. MGM will book a $93 million loss after the transaction but will nevertheless substantially improve its cash position in the process.

That’s expected to help MGM majority owner Kirk Kerkorian strengthen a push for VUE when Vivendi Universal stages a second round of bidding for its entertainment assets.

The Viv U board meets today in Paris to review the bids and possibly narrow the field of contenders for the conglom’s U.S. entertainment assets. There is, of course, no guarantee that MGM will make the cut for the next bidding round. It’s believed the Lion recently offered $11 billion for VUE in an initial round of nonbinding bids.

“We are turning an asset for which the financial community gave us little credit into over $2 per share in cash,” MGM chairman-CEO Alex Yemenidjian said. “Upon completion of the (Rainbow) transaction, our balance sheet will be 100% debt free, which will give us more flexibility in pursuing other value creation opportunities for our shareholders.”

Cablevision coup

Analysts said the deal also helps Cablevision, which takes back 100% control of the three channels at a significant discount compared to other recent deals for cable networks.

Prudential Securities estimated the purchase price reps about 15 times operating cash flow, compared to the 27 times cash flow multiple that MGM paid when it acquired its stakes two years ago. The valuation is also lower than what Viacom paid for Comedy Central, and former Rainbow sibling Bravo sold to NBC for about 20 times cash flow.

It appears the Lion was willing to take a few short-term lumps for more compelling strategic considerations. The transaction also gets MGM out from under a minority investment that it felt was doing the studio little good; Lion previously tried to gain 100% ownership of the webs to no avail.

The studio had acquired the stakes, plus a similar interest in the Bravo web, for $825 million in April 2001. NBC acquired Bravo from Rainbow and MGM last year for $1.25 billion, with Lion reaping $250 million.

Debt-free studio

In the latest transaction, Cablevision will pay MGM $250 million in cash upon closing on the deal in the third quarter, plus another $250 million in the form of a five-month promissory note to be paid off in cash or stock. The proceeds will give MGM $1.2 billion in cash reserves against $1.2 billion in debt — effectively making the studio debt-free.

And that presents a tidy backdrop to its march on VUE.

MGM has lined up a group of investment banks to back a recently placed $11 billion offer for 100% of VUE. Backers are believed to include longtime Kerkorian lender Bank of America, plus Morgan Stanley and Providence Equity Partners.

Offer would allow Viv U to cash out completely from all entertainment assets other than music operations, but a big chunk of the transaction would likely come in the form of MGM stock. So cleaning up its balance sheet allows MGM to pencil in a higher value for its own participation in such a deal.

MGM shares gained a bit Monday after the deal was announced. The stock climbed 9¢ to close at $12.42 in active trading on the New York Stock Exchange.

Bronfman benefits

MGM’s Rainbow sale also has a VUE connection for Cablevision, which last month pledged the Rainbow webs to Edgar Bronfman Jr. for his VUE bid. They will now own those assets free and clear, making for a cleaner Bronfman offer to Viv U.

Some believe MGM eventually could collaborate with either Bronfman or General Electric’s NBC in the next round of bidding. MGM has held informal talks with NBC brass from time to time, but it’s unclear whether there have been any such talks recently.

Other VUE suitors in the first round of bidders included John Malone’s Liberty Media and a group headed by former 20th Century Fox owner Marvin Davis.

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