How disciplined Time Warner is in bidding for Metro-Goldwyn-Mayer will determine whether the storied studio gets sold or is rescued through a bankruptcy.
Bids for MGM are due today, and while 12 companies — including Lionsgate, Summit Entertainment and Liberty Media — have signed non-disclosure agreements, sources said only about six of them are expected to actually submit offers.
Of those six, Time Warner has the most firepower, making MGM the media giant’s to lose.
Time Warner CEO Jeff Bewkes has to figure out what price will be enough to entice MGM’s 150 creditors to sell rather than pursue a recapitalization. And he must be careful not to overpay.
“Time Warner knows no one else is around, so they’ll bid low to see if they can steal it,” said one source involved in the auction. “But creditors aren’t going to do a fire sale.
“Everyone thinks it’s a bad time to sell, so if the bid is too low, the creditors will restructure and get private equity to put in some cash, stay independent and try to sell again in a better climate to capture some upside.”
Sources said a Time Warner bid of around $1.8 billion would likely be enough to both chase other bidders out of the auction and convince MGM’s creditors to sell.
“It’s not a must-have asset for them; it’s a like-to-have asset,” said the source. “They’ll take it at the right price.”
A Time Warner spokesman declined comment.
Sources said MGM’s creditors are looking for $2 billion or more in a sale. That figure is based in part on vulture investors having bought MGM’s debt at around 60 cents on the dollar, which pegs MGM’s value at roughly $2.3 billion based on its $3.7 billion in debt. A $2 billion price tag is roughly 54 cents per $1 of debt.
While MGM’s creditors realize they are going to have to take a haircut in a sale, they’d also like to minimize the loss as much as possible.
“We find it unlikely that MGM’s creditors would cleanly agree to a sale price materially below $2 billion,” wrote Barclays Capital analyst Anthony DiClemente in a report.
At the same time, DiClemente and other analysts have previously expressed concern that Time Warner might use its $5 billion in cash to complete a pricey or unnecessary acquisition. Moreover, given how outspoken Bewkes has been about media deals destroying rather than creating value, he runs the risk of damaging his credibility if he shells out too much for MGM.
“Bewkes is acutely aware of the fact that investors would punish the company’s stock if he is overly aggressive on [MGM],” said a source familiar with Time Warner.
Nevertheless, Time Warner has lusted after MGM for years, getting beat out by MGM’s current owners nearly five years ago — and for good reason. Combined, the two studios would have Hollywood’s biggest film library. Also, Time Warner is a leader at marketing tentpole films, while MGM owns the rights to venerable franchises such as “James Bond” and “Robocop.” The two studios are partners in the next two “Hobbit” films.