Buyout buzz in Lion’s den

Analysts take mixed view of MGM purchase

NEW YORK — MGM stock roared to life Thursday after another raft of press speculation put Time Warner back in the lead to snare the Lion with a cash and share-based bid for the company that could top Sony’s more complex, private-equity backed effort.

Lion shares gained 4.63% Thursday to close at $12.66 thanks to rumors that Time Warner is assembling a tidy $4.7 billion package that would give MGM owner Kirk Kerkorian a hefty wad of Time Warner stock. Though companies denied any firm offer, the well-timed reports certainly created the impression of a bidding war just as the sale process with Sony was threatening to bog down over terms.

A report in the New York Times suggests Time Warner will buy out MGM public shareholders at $13 per share in cash (about $800 million) and issue some $2 billion in new shares to trade with Kerkorian for his MGM stock. Deal would value Kerkorian’s 74% stake in MGM at about $11.50 per share.

This tax-advantaged structure (Daily Variety, June 29) suggests Time Warner would also assume the $1.8 billion in debt that MGM assumed in order to pay itself a juicy $8 per share dividend in May.

Analysts at Merrill Lynch said that even though such a deal could up Time Warner’s debt load by $2.6 billion to $19.3 billion, company would still have resources to pursue an acquisition of Adelphia Communications later this year.

Analyst Rich Greenfield of Fulcrum was more circumspect about Time Warner’s motivations to pay top dollar for the 4,000-title MGM library. He notes that with 6,600 titles and 25% of the DVD market, Time Warner’s existing library is already far larger than that of any of its studio rivals. Sony, with 3,500 titles (and only 12% of DVD sales), is certainly more motivated to add content scale, but its talks with its backers have bogged down over exit terms. NBC has also been crunching numbers for a possible MGM bid, though no offer has yet been disclosed.

Fulcrum does not believe Time Warner has any interest in overpaying for MGM, which it has been sizing up since late last year, so it’s not a question of a bidding war.

Like Sony and presumably NBC, Time Warner would have to shut down MGM’s new production (with some $200 million in overhead) in order to achieve the necessary cost savings to justify the price.

“We hope they do not acquire MGM,” Greenfield concluded in a note Thursday. “Given that Time Warner is still in the early stages of rebuilding credibility, we believe any major transaction (MGM, Adelphia, etc…) will not be viewed positively by investors in the near term despite the potential long-term benefits.”

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