(
)
When Providence Equity Partners invested in Metro-Goldwyn-Mayer five years ago, the firm believed it was buying into one of Hollywood’s most fabled studios.
Now those celluloid dreams are giving way to a harsh reality. Providence, the largest private-equity firm focused on media, stands to lose some $400 million when MGM files for bankruptcy this week.
On Friday, MGM gained the approval of creditors to proceed with a prepackaged bankruptcy plan that will cut $4 billion of debt and wipe out Providence, TPG and other equity investors that took the studio private in a 2005 leveraged buyout.
While other investors will take a hit on the deal, Providence cut the biggest private-equity check for the studio. The high-profile loss also comes at an inopportune time for Providence, which is seeking to raise $8 billion from investors for a new fund that it has just started marketing.
Besides MGM, Providence, which oversees $22 billion in equity investments and is headed by Jonathan Nelson, has not fared well in leveraged buyouts of Hispanic broadcaster Univision and Spanish cable-TV operator ONO. The firm has raised $16 billion for two funds since 2004. Both funds are roughly breaking even while underperforming many of their peers, according to a pension manager familiar with the fund’s performance.
Meanwhile, Providence’s Nelson has tried to refurbish the reputation of PE firms. In a May interview with Charlie Rose, Nelson said private equity is a misnomer and suggested changing the name to “partner capital” or “growth capital.”
Providence and TPG, along with Comcast and Sony, paid roughly $5 billion in debt and equity in 2005 to acquire then-publicly traded MGM from billionaire Kirk Kerkorian. They financed most of the deal by doubling MGM’s $2 billion of debt and using the proceeds from the loans to pay selling shareholders.
The original plan called for cutting most production, milking the studio’s existing library of hits, such as the James Bond franchise, and slashing $250 million in overhead by merging MGM’s and Sony’s distribution units.
However, the cash MGM generated from distributing movies to TV stations soon collapsed, the source said. In May 2006, MGM terminated its distribution deal with Sony and inked a new pact with Twentieth Century Fox. (Fox is part of News Corp., which also owns The Post.)
MGM also changed course by ramping up its own film production. The studio’s ability to raise funds for new movies, however, was hampered by the depressed credit markets, while releases such “Valkyrie,” starring Tom Cruise as a German officer who tries to overthrow Hitler, flopped. It didn’t help that DVD sales have been in decline across the industry.
Providence declined comment. jkosman@nypost.com