Turner Signs Agreement to Buy MGM : Ends Controversial $5-Billion Effort to Take Over CBS

Following days of negotiations and heavy stock-market trading, Turner Broadcasting System and MGM/UA Entertainment Co. announced a definitive merger agreement Wednesday.

Simultaneously, Turner said it is ending its controversial $5-billion effort to acquire CBS Inc., which the network had fought ferociously.

Turner is to pay $29 a share, or about $1.5 billion cash, for Culver City-based MGM/UA. But Turner is to get back $470 million in a simultaneous sale of the studio’s United Artists subsidiary to MGM/UA majority shareholder Kirk Kerkorian.

Wall Street showed continuing skepticism over Turner’s chances of raising the $1 billion that he needs by sending MGM/UA’s market price up only another 25 cents after the news, although the definitive agreement was announced early in the day. The issue closed at $24.25 a share.

The gap between the $29-a-share purchase price and the market price was further evidence that the financial community was not fully sold on the latest financial enterprise of Ted Turner, who heads the broadcasting firm.

Heavy Trading in Stock

The $29-per-share price had been known since Monday, when both sides disclosed the outline of a proposed deal. The movie company’s shares have risen $6.25 in three days and more than $8 since late last week.

Nearly 2.2 million shares of MGM/UA changed hands Wednesday in the continuation of high volume trading that began Monday.

The Turner firm confirmed widespread speculation that it has hired MGM/UA’s New York investment banker, Drexel Burnham Lambert, to advise it on the necessary financing for its MGM/UA purchase.

“In the engagement letter,” Turner Broadcasting said, “Drexel Burnham Lambert undertook to use its best efforts to secure the financing on a timely basis.”

Michael D. Brown, managing director in charge of mergers and acquisitions at Drexel Burnham’s West Coast offices here, later said that the firm will make a “due diligence” examination of both MGM/UA and Turner Broadcasting, check cash-flow data and test alternative financing possibilities. That should take about five days, he said.

The next step, if warranted, would be the rendering of a letter saying that the firm is “highly confident” that it can accomplish the financing, Brown said.

MGM/UA Chairman Frank Rothman said any questions about the financing of Turner’s purchase should go to the broadcaster, adding: “Our side is in no way, shape or form involved in the financing. We’re not participating in it, directly or indirectly.”

Kerkorian Deal

He declined to comment on statements by entertainment analysts that the cash flow of MGM would not be nearly enough to service the debt that Turner likely would have to load on it to close the deal.

In their announcement, Turner and MGM/UA said they agreed to sell all of the stock of the United Artists subsidiary to Kerkorian for $9 for each MGM/UA share presently outstanding, or a total of about $470 million.

Kerkorian, who owns 50.1% of MGM/UA’s stock, has agreed, “as soon as practicable after the merger,” to offer to sell the minority interest pro rata to the MGM/UA public shareholders on the same proportionate terms as he paid, the announcement said.

The agreement included a granting of conditional options by MGM/UA and Kerkorian assuring Turner the right to buy a majority of the studio’s stock. The options are “generally exercisable,” the announcement said, “if MGM/UA’s board of directors approves any other merger or similar transaction with another party” or any other person seeks to acquire 10% or more of MGM/UA’s stock.

The deal is subject to approval by the movie company’s shareholders.

The parties earlier said they expected the purchase to be concluded by early in the fourth quarter of this year.

Rothman said his company’s board, by approving the deal late Tuesday, showed that it “will not only permit our stockholders to realize substantial appreciation on their investment in MGM/UA but will also offer them the opportunity through United Artists to remain as shareholders of a major motion picture company.”

In response to questions in a telephone interview Wednesday, Rothman said the new Kerkorian-controlled United Artists will “without question” go into film production.

He said that UA “should be in place certainly before the end of the calendar year,” and that the first order will be to get a production team together.

All present MGM/UA personnel will remain with Turner’s MGM Entertainment Co., Rothman reiterated, and he said that he has agreed to remain “through the transition period.”

“He (Turner) will have people coming in, and they will have their judgments on who they want to take over.”

It is widely assumed that Rothman will later go with Kerkorian and UA.

As for where United Artists might have studio facilities, Rothman said: “We haven’t got that worked out yet.”

Turner, whose spokesmen said they could not answer questions outside the texts of the announcements, was quoted as saying that the MGM acquisition “represents an excellent opportunity to improve the strength and stability of TBS.”

“We think the business of MGM is highly compatible with TBS’ existing operations,” he added. “We look forward to prompt completion of the merger and working with the employees of MGM toward a smooth transition.”