Metro-Goldwyn-Mayer Chairman and CEO Harry Sloan’s plan to rebuild a full-fledged movie studio, highlighted by last week’s hiring of Mary Parent to oversee theatrical production, threatens to rupture the already tenuous relationship among the studio’s financial backers.
At the same time, two sources with knowledge of the situation said that hedge funds and other investors have designs on buying up MGM’s $3.7 billion in bank debt on a bet that they could gain control of the studio if it fails to make interest payments on its debt.
The credit crisis has caused prices on debt to fall sharply, opening the door for vulture investors “to buy MGM’s debt at a discount and put them in a position to elbow out the equity holders,” said a source.
According to two sources familiar with MGM’s finances, the studio generates about $400 million in annual cash flow but has interest expenses of roughly $300 million. Though sources said that is enough to service its debt, little is left to finance movies.
An MGM spokesman said the studio “generates significant cash flow and in the short-term has plenty of funds to accomplish its plans.”
Those plans, however, are a source of contention among MGM’s owners – Providence Equity Partners, Texas Pacific Group, Sony, Comcast, and others.
“The belief among some shareholders is that the right strategy for MGM is not what Harry is doing in rebuilding the studio infrastructure, but to instead maximize the value of the library in all formats and then sell the company,” said one source who is close to the investor group.
A spokesman for Providence Equity said, “We are supportive of MGM and Harry’s strategy.”
Providence and TPG have the most skin in the game and need Sloan to increase MGM’s value if they have any chance of recouping their equity investment. MGM’s remaining four owners are understood to be aligned in the other camp, sources said.
While Parent is regarded as one of Hollywood’s top talents, sources question whether MGM has the money to finance her ambitious production tastes. MGM so far has failed to secure its own film financing slate, and sources question Sloan’s claim that MGM has access to $950 million in financing.
The studio has a $175 million loan and a $250 million revolving credit facility, but only the latter can be used to finance productions. The former is for marketing and amortization costs alone. And MGM does not have unfettered access to the $500 million in financing held by subsidiary United Artists.
Separate from its financial issues, sources said Parent’s arrival also means the likely departure of chief operating officer Rick Sands.