Harry Sloan has been pushed aside as CEO of Metro-Goldwyn-Mayer after finally exhausting the patience — and nearly all of the money — of the film studio’s financial backers.
According to multiple sources close to MGM, private-equity firms Providence Equity Partners and Texas Pacific Group grew disillusioned with Sloan’s history of costing the studio millions through poor management decisions and lavish spending at a time when MGM should have been watching every penny.
MGM said it will create a three-person “office of the CEO” to replace Sloan. It will include motion picture head Mary Parent, CFO Bedi Singh and Stephen Cooper, a vice chairman at restructuring firm Zolfo Cooper, which was hired to help MGM deal with its nearly $4 billion debt load.
The CEO shuffle reflects a stark turnabout for Sloan, who initially had Providence and TPG’s full support. However, his “magical hold” slowly eroded over the last 24 months as he led MGM down one wrong path after another. Though MGM is owned by a consortium that also includes Sony Corp., Comcast, Quadrangle Partners and DLJ Merchant Banking Partners, the de facto leaders are Providence and TPG since they have the most invested in the studio.
Sources said the two PE firms grew so disenchanted with Sloan that they resisted letting him stay on the board as non-executive chairman. However, they eventually relented, given Sloan is personally invested in the studio.
The partners initially bought MGM for $5 billion with a plan to milk its industry-leading movie library for cash. Those plans went south with the DVD market, giving Sloan an opportunity to push the partners to get back into movie production.
But while the partners were imagining a mini-major like Lionsgate, Sloan wanted to create a new Paramount or Universal. “He had delusions of grandeur,” said one source close to MGM.
But Sloan was unable to raise third-party financing to make his dream come true, leaving MGM with little money to make movies.
Sloan relaunched United Artists and joined in the creation of a new pay-movie channel called Epix, both of which are seen as huge cash drains. Meanwhile, MGM’s overhead has mushroomed to $160 million, according to a source who has seen the studio’s books.
Sloan also was known to take executives on expensive corporate retreats. Last summer, a team flew out to Aspen, Colo. on private planes, staying five days at a five-star hotel and dining at top restaurants. A source who spoke with one of the executives who attended the trip said no business was discussed.
Despite its dire financial state, however, MGM likely won’t be forced into bankruptcy because such a move would render everyone a loser, particularly the banks that hold $3.8 billion in debt that matures in 2012. Indeed, if sold, MGM’s film library and the other assets would likely fetch less than the debt load. Plus, a bankruptcy would hurt MGM’s brand, making it difficult to attract talent.
MGM’s next financial hurdle is a $250 million payment on a revolving credit facility due in April. In addition to Zolfo Cooper, the studio is also working with Moelis & Co. in debt renegotations. JPMorgan Chase is leading talks for the creditor side.
But Sources think MGM might face a cash-flow problem in the coming months since the bulk of its revenue is derived from the film library. That cash generation might not cover the $250 million payment and market MGM’s upcoming films.