MGM/UA, Turner OK New Financing Terms

MGM/UA Entertainment accepted revised terms Wednesday for its acquisition by Turner Broadcasting System that substitute preferred stock for $4 of the previously agreed upon $29-per-share cash price.

In a joint announcement after all-night negotiations at the Culver City movie studio, the parties also indicated that the $1.5-billion merger was now much more certain to be completed because the change eliminates most of the remaining conditions of the previous agreement. Turner’s investment banker said that “basically all the outs have been removed from the agreement.”

The changes in the sale terms will ease the burden on Turner’s investment banker to raise cash from debt securities to complete the purchase, now expected in December.

Problems With Financing

Original questions about how and whether the deal could be financed by the merged firms’ cash flow have been revived in the last two weeks by Wall Street analysts and investors, amid reports that investment banker Drexel Burnham Lambert was having some problems with the financing for Turner.

MGM/UA’s stock price has receded from a high of $27 during the renewed uncertainty. It closed up 12.5 cents at $25.50 on Wednesday in New York Stock Exchange composite trading.

Terms now call for Turner to swap $25 cash and one share of new Turner convertible preferred stock for each share of MGM/UA common.

Some securities analysts agreed that the preferred stock would be worth roughly $4 a share. Although it will pay no dividends for the first five years, it will have an immediate market value as a publicly traded security, they noted.

In a statement, MGM Chairman Frank Rothman said that he is “delighted” that the acquisition deal, which has run into some financing problems since it was announced Aug. 7, “has taken a giant step forward.”

Questions ‘Put to Rest’

“The questions raised by some members of the investment community have finally been put to rest by this amendment to our agreement,” he said.

Ted Turner, president and chairman of Atlanta-based Turner Broadcasting, was quoted in the announcement as saying that the deal “continues to be an exciting business opportunity.”

He also said his company has completed the structuring of its financing with Drexel Burnham, “who continue to be highly confident that the necessary financing will be obtained expeditiously.”

The parties said Turner Broadcasting now intends to file its registration statement Monday on the financing.

It is to consist of proceeds from the offering of $500 million of zero coupon senior notes due between 1987 and 1991, $250 million of increasing rate senior notes due 1991, $500 million of senior subordinated debentures due 2000 and 5 million shares of series A cumulative convertible preferred stock.

The announcement said holders of the preferred will be entitled, beginning in the sixth year after issuance, to annual dividends equal to $1.2375 per share. Annual mandatory redemptions by Turner of preferred at $8.25 per share will begin 11 years after issuance, with the entire issue retired by the 15th year.

Referring to Kirk Kerkorian, who owns more than 50% of MGM/UA’s stock, New York analyst Lee Isgur of Paine Webber commented:

“If it’s good enough for Kerkorian, it’s good enough for me.”

Isgur added that someone holding MGM/UA stock in December “will get something awful close to $29.” He said he figures that the Turner preferred will have a trading value of “no less than $3 and could easily be $5.50 a share.” This scenario could put the potential value as low as $28 per MGM/UA share and as high as $30.50.

‘Rather Have $29 Cash’

Dennis Forst, research vice president of Amdec Seidler Securities in Los Angeles, agreed that the preferred will be worth about $4. However, he added, “If I were an MGM stockholder, I would rather have $29 cash.”

He said the fact that MGM/UA’s stock price went up only slightly Wednesday indicates to him “the same level of concern about the ability of Turner to sell (its) debt issues.”

Michael Brown, a managing director at Drexel Burnham’s offices here who is heading the Turner financing effort, commented:

“Basically, all of the outs have been removed from the agreement. Both sides are committed to get this done. Not that they haven’t always been, but this is further evidence of the resolve to complete the transaction.”

He said the substitution of preferred stock as part of the purchase price “adds an additional measure of financial safety to the transaction.”

In response to a question, Brown said the change slows the rate of pay-back because of the lack of dividends in the first five years. “It is basically tailored to dovetail with our view of the future cash flow,” he added.

As to the value of the preferred, Brown said it is a case of “beauty being in the eyes of the beholder.” If the market discounts it at 15%, it is worth $4. At a 14% discount, he said, “it is pennies better.”

The Turner-MGM/UA announcement said the revised transaction was subject to approval of both boards, scheduled for today, and by MGM/UA shareholders at a special meeting to be scheduled later this month.

The parties also said the revisions will have no affect on the previously announced sale by MGM/UA of its United Artists subsidiary to Kerkorian for about $500 million concurrently with the merger and the subsequent offer by Kerkorian of a minority interest in UA to former MGM/UA shareholders.