Turner Acknowledges MGM Merger Trouble; Firms Renegotiating

MGM/UA Entertainment Co. and Turner Broadcasting System said Monday that their $1.45-billion merger deal is in some trouble and that efforts are under way to salvage it. The joint statement by the Culver City movie company and the Atlanta broadcaster 80% owned by entrepreneur Ted Turner was the first official comment since The Times reported Saturday that complications apparently had developed in the deal.

In the terse announcement put out over the name of MGM/UA Chairman Frank Rothman, the parties said they “are in discussions with a view to a possible restructuring of the agreement under which Turner Broadcasting is to acquire MGM/UA.” The agreement includes a simultaneous sale of MGM’s United Artists subsidiary to Kirk Kerkorian, who controls MGM/UA with 50% of its stock.

The release added: “The companies said talks are taking place because Turner Broadcasting advised MGM/UA that it encountered ‘certain difficulties’ in completing the pending acquisition under their current agreement.”

The latter wording appeared to indicate that, as previously speculated, the New York investment firm of Drexel Burnham Lambert was having difficulty arranging the financing that it had told Turner it was “confident” it could accomplish--primarily by selling high-risk, high-yield “junk bonds.”

Former Drexel Client

Kerkorian was a client of Drexel Burnham before the firm was hired by Turner Broadcasting to put together financing for its entry into Hollywood.

Neither Rothman nor other MGM/UA officials nor Turner Broadcasting spokesmen returned inquiries Monday about their joint announcement. Officials of Drexel Burnham’s West Coast offices in Beverly Hills also could not be reached for comment on reports that they wanted to pull out of the MGM/UA acquisition.

There was little change in the stock price of MGM/UA (which closed Monday up 12.5 cents a share at $21.125) and none for Turner Broadcasting (which remained at $15). The parties’ announcement was made after the markets closed.

Wall Street has been rife with rumors for weeks that Drexel Burnham was having trouble arranging the mountain of debt contemplated to close the MGM/UA transaction.

In a series of complications, negotiations fell through between Turner and prospective buyers of Turner Broadcasting or MGM assets. This left the future of MGM as a studio up in the air because of Turner’s figures showing a huge shortfall in cash to run it after the projected merger takes place.

Renegotiated Once

The Turner-MGM deal was renegotiated once--in October--to reduce the Turner offer to $25 cash and a share of new Turner Broadcasting preferred stock for each MGM share from the $29 cash offer last August.

Some expert observers had long been pessimistic about the chances of the merger.

“My feeling ever since the deal was announced is that it was destined to fall apart,” a Los Angeles-based research official told The Times last week. The official, who declined to be quoted by name, added: “The price he’s paying is absurd.”

He added that the deal cannot be “fixed” because the price is “ridiculous.”

Another view was expressed Monday by Steven Rosenberg, analyst here for Paul Kagan & Associates:

“The skeptics will say, ‘I told you so,’ but my gut feeling is that something is still going to happen (to salvage the deal).”

One critic said Turner made a mistake in not making the deal contingent upon the successful arrangement of the financing, calling it “unheard of.”

Turner’s previous filings with the Securities and Exchange Commission disclose few “outs” for either party.

Basically, Turner’s obligations are subject to accuracy of “certain” representations and warranties by MGM/UA and the performance of all required acts by MGM/UA.

However, the document says, if the deal is not closed by Feb. 28, either party may terminate the merger.

It is widely believed that MGM/UA would have legal recourse if Turner does back out. Among other things, the Kerkorian forces have set up and staffed the new, independent United Artists that is to be spun off in the deal.

The Turner registration set out risk factors that include the following: “To the extent that (Turner) does not sell or otherwise dispose of MGM’s production and distribution assets, (Turner) intends that MGM will continue in the business of financing, producing and distributing filmed entertainment. (Turner’s) highly leveraged condition following the merger, however, will limit MGM’s ability to engage in traditional motion picture studio financing of motion pictures.

“Such condition will require MGM to rely, to a greater extent than in the past, upon financing of production or distribution costs by third parties, rather than by internally generated funds and bank financing. Such limitation could result in fewer pictures being produced each year and may restrict MGM’s ability to attract successful independent producers and other desirable creative elements in motion picture production.”

The same document states that Turner primarily seeks to obtain the MGM film library to assure needed programming for his Atlanta superstation, WTBS.

Ironically, the contract provides that Kerkorian’s new UA will get all proceeds from MGM/UA’s big box-office hit, “Rocky IV,” under a division of MGM and UA assets.