Metro-Goldwyn-Mayer Inc. isn't the only fading star of Hollywood to have denied, at least initially, that some sort of rehab might be in order. Nor is it alone in confounding its enablers and stakeholders about what form such treatment should take.
But that's why the studio known as the Lion, which in December ended a seven-week stint in bankruptcy, qualifies for a Deal of the Year. Bankruptcy was the easy part, whereas getting there took 20 months to quell infighting, weigh alternatives, commit to a plan and ward off an interloper by the name of Carl Icahn.
This particular phase of the Lion's 87 years began in April 2009, when management retained Moelis & Co. LLC to focus on the studio's looming debt maturities. But in September 2009, the brief originally assigned the restructuring specialist changed. With industrywide pressures and company-specific issues bearing down, Moelis drafted a confidential information memorandum and prepared a list of potential buyers.
This exercise quickly morphed into a full-blown auction that, in January 2010, generated eight indications of interest. A second round three months later reduced the field to three nonbinding bids, topped by a $1.5 billion offer from Time Warner Inc.
However, once a steering committee of MGM's creditors rejected all three bids, another rethink was required. A crash course on Hollywood ensued, with MGM's 100-plus creditors cast as students. Among the instructors and prospective leaders paraded before this wary yet unruly group were: Jonathan Dolgen, former head of Paramount Pictures Corp.; Mary Parent, respected veteran in charge of MGM's movie production since March 2008; Joe Roth, who for years ran the Walt Disney Studios; and Terry Semel, a longtime co-leader of Warner Bros. Entertainment Inc.
All called for the Lion to spend more -- much more -- to regain its roar. But the advice fell on deaf ears. MGM had racked up liabilities of nearly $6 billion and, between September 2009 and October 2010, would blow through seven forbearance agreements.
Another problem with the spend-your-way-to-former-glory schemes presented to MGM's creditors was their similarity to strategies already found wanting. Sure, they might have worked when domestic DVD sales were still ratcheting upward by double digits. But in 2010, with an annual 11.4% decline as measured by the Digital Entertainment Group, DVD sales extended their downtrend to four years.
No one felt this more than MGM's prebankruptcy owners: Providence Equity Partners LLC (35% stake), TPG Capital (23%), Comcast Corp. (21%), Sony Corp. of America (14%) and DLJ Merchant Banking Partners (8%). Their takeover of MGM in April 2005 occurred as DVD sales were peaking -- a climax officially attained in 2006, when domestic DVD sales of $20.2 billion were 120% greater than the year's domestic box office of $9.2 billion. Compare that to 2010, when domestic DVD sales of $14 billion were only 32% more than a box office of $10.6 billion.
Not only were MGM owners relying on a continuing growth trajectory for DVD sales but, because of the product's fat margins, they were counting on an even greater profit trajectory. The reversal proved so profound that, by March 2007, Sony reported that its MGM stake had been written "down to zero."
Well aware of this history, creditors were reluctant to repeat it. This made them particularly receptive to a proposal from Gary Barber and Roger Birnbaum, Hollywood veterans who share the titles of chairman and CEO at Spyglass Entertainment Holdings LLC.
Spyglass, the smallish studio behind such biggish films like "Dinner for Schmucks," "Get Him to the Greek" and recent box office leader "No Strings Attached," has been a portfolio company of Cerberus Capital Management LP since January 2008. And despite Cerberus' reputation for being "tough," as a source puts it, Spyglass' relationship with the firm appears exemplary.
That alone gave Barber and Birnbaum an edge. It didn't hurt that they were represented by Deutsche Bank AG, which previously linked them to Cerberus. But what really put them across was their appeal to a group whose MGM debt would become MGM equity should the studio file for bankruptcy.
"They focused on the minimum investment necessary to keep the franchise going -- on the least amount required to exploit the library, channels, television business and, of course, movies," a source says. "They pitched it in a way that had members of the steering committee believing Gary and Roger cared about return on capital as much as they did."
The pitch was such a hit that talks quickly moved to governance and equity interest issues. Yet, before the curtain came all the way down, others pranced across the MGM stage. Most prominent of these were Icahn and Lions Gate Entertainment Corp., whose conflicts with each other were sufficiently dramatic without implicating the Lion. But implicate they did, together and apart.
The effort together required a 10-day truce between the two, during which Icahn and Lions Gate jointly pressed for MGM's takeover. The effort apart featured Icahn not only as a buyer of MGM debt but as a would-be spoiler of the commitment that Spyglass had obtained from MGM's creditors to back its plan.
Icahn's counterplan saw Lions Gate replacing Spyglass as a merger partner for MGM and as leader of the combined entity. And its presentation in October proved sufficiently intriguing to warrant a week's delay in the vote of secured lenders on Spyglass' plan.
Despite the delay, not to mention other efforts by Icahn to derail Spyglass, the original plan received what MGM called overwhelming approval. So, aside from modest revisions aimed at appeasing Icahn, MGM's secured lenders swapped the $4.74 billion the Lion owed them for 99.46% of its reorganized equity. (The remaining 0.54% went to Barber and Birnbaum.) And, by doing so, they finally got a long-distracted but no-longer-in-denial studio the rehabilitation it really did need.
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