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International: Sony beats Time Warner to buy MGM

15-September-2004
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International: Sony beats Time Warner to buy MGM

Sony last night seized control of Metro-Goldwyn-Mayer (MGM) after a consortium led by the Japanese electronics giant reached a preliminary agreement to buy the last independent Hollywood studio for about $4.8 billion.

People close to the talks said MGM had accepted a cash offer that valued the company at about $12 a share, and includes the assumption of about $1.9 billion in debt. The deal trounced a rival bid from Time Warner, the media group, which yesterday withdrew its $4.6 billion offer after concluding a higher price would not be prudent.

The agreement represents a dramatic turnround for the consortium, which has been stalking MGM for the past six months but as late as last week appeared to have lost the initiative to Time Warner.

People close to the talks said MGM changed its mind after Sony’s group on Sunday raised its bid from $11.25 a share and offered to pay a $150 million non-refundable deposit in case the deal fell through.

The consortium also benefited from the last-minute inclusion of Comcast, the cable giant, which helped to support the higher valuation by agreeing to co-operate with Sony to launch new channels and video-on-demand services based on its expanded library of films and TV programmes. Comcast has an option to join the consortium as an investor after the deal is finalised.

If completed, the deal will mark a final farewell from Hollywood for Kirk Kerkorian, the billionaire investor who has bought and sold MGM several times since he first took control of the studio more than 30 years ago.

It is also a coup for Howard Stringer, chairman of Sony Corporation of America, in his efforts to strengthen the company’s entertainment assets as it grapples with new technologies and forms of distribution in the digital age.

The consortium’s largest investor is Providence Equity Partners, which is putting up around $450 million, while Sony and Texas Pacific Group are each investing $300 million and the private equity arm of Credit Suisse First Boston (CSFB) is contributing $250 million. JP Morgan and CSFB are providing debt financing and are also acting as advisers to the group. MGM was advised by Goldman Sachs.

Under the agreement, Sony will distribute MGM’s library of more than 4000 movies alongside its own, giving it greater clout with retailers, cable groups and other distributors.

MGM’s film-production unit will be scaled back to concentrate on established franchises such as the James Bond films. However, the library will remain a standalone entity, and the investors will have the option to exit through a sale or IPO in the future.

Time Warner’s decision to pull out is a further signal of the company’s determination to maintain financial discipline on acquisitions after recovering from its disastrous merger with America Online.

“Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity,” Dick Parsons, Time Warner’s chairman and chief executive, said.

“We are confident that there are other capital allocation choices that will enable us to continue to build shareholder value.”

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