Pathe to Buy MGM/UA in $1.27-Billion Deal : Hollywood: The surprise sale agreement puts still another major studio in foreign hands.

MGM/UA Communications Co. agreed Wednesday to be sold for about $1.27 billion to Pathe Communications Co. in a deal that will put yet another Hollywood studio in the hands of foreign owners.

Pathe is controlled by Italian businessman Giancarlo Parretti and other European investors. MGM/UA will become the third major studio sold to foreign interests, after 20th Century Fox, which is owned by Australian-based News Corp., and Columbia Pictures, which is owned by Sony Corp. of Japan.

The surprise sale agreement apparently will end investor Kirk Kerkorian’s 20-year involvement with MGM/UA. The secretive businessman, who is 72, bought his first stake in the Culver City movie and television studio in 1969, after building a fortune with various airline and Las Vegas real estate and gambling ventures.

The sale comes just two months after Kerkorian said he was dropping his long-running attempts to sell the studio in order to concentrate on movie and television production.

MGM/UA shares, which had traded as low as $10.75 in the last year, shot up $3.75 to close at $17.75 in heavy trading of 1.3 million shares Wednesday on the New York Stock Exchange. The purchase agreement is valued at $20 a share for both common and preferred stock. Pathe would also assume nearly $400 million in MGM/UA debt.

The companies said Pathe would begin a tender offer for all MGM/UA shares in five days.

It was not immediately clear how Pathe planned to raise financing for the billion-dollar acquisition, which is scheduled to close June 29.

But the MGM/UA board--which had approved a similar acquisition by Australian-based Qintex Group last year, only to see the deal collapse for lack of financing--extracted heavy guarantees against a similar collapse.

According to both parties, those guarantees include a $200-million “security deposit” to be placed in four equal installments of $50 million into an escrow account at Security Pacific Bank each month beginning March 9.

In addition, Pathe has pledged to MGM/UA $75 million in net proceeds from MGM/UA’s release of three Pathe-produced films, which include “The Russia House” and “Quigley Down Under.” MGM/UA declined to identify the third picture against which proceeds have been guaranteed. MGM/UA Chairman Jeffrey C. Barbakow said Pathe would get back the $75 million from movie advances if the deal is consummated.

MGM/UA’s agreement to distribute Pathe films appeared to conflict with a separate agreement under which Time Warner’s Warner Bros. unit was supposed to distribute the same movies.

A Time Warner spokeswoman insisted Wednesday that Warner Bros. had four years remaining on a five-year distribution agreement with Pathe. The spokeswoman said she did not believe the conflict would lead to litigation, but she also disavowed speculation that Warner Bros. was somehow involved in financing the deal for Pathe, perhaps by buying some rights to the 1,000-film United Artists library, which appears to be MGM/UA’s principal asset.

Richard Berger, president of MGM/UA’s film group, said his company has a written agreement to distribute the movies, but he acknowledged that Pathe Co-Chairman Alan Ladd Jr. had previously agreed to release the films through Warner Bros.

“In Laddie’s mind, I think the movies were committed to Warner Bros. But if Pathe bought a company with distribution, they had the right to move (the deal),” Berger said. Both Ladd and a spokesman declined to comment.

In an interview, MGM/UA Chairman Barbakow, a former Merrill Lynch investment banker, said the move will end Kerkorian’s involvement with the studio, which has undergone repeated restructurings and attempted mergers or sales during his long tenure.

“He is selling 100% of his position. He’s out,” Barbakow said.

Kerkorian’s private holding company, Tracinda Corp., owns 71.7% of MGM/UA’s outstanding stock. Another 9.9% was donated by Kerkorian last year to the Lincy Foundation, a Beverly Hills-based charity.

In 1985, Kerkorian agreed to sell MGM/UA to Turner Broadcasting System for $1.5 billion, but he subsequently bought back, in separate deals, the United Artists division and the “Leo the Lion” logo along with the MGM movie production and television production and distribution assets.

Since then, a dizzying number of potential buyers have surfaced, including financier Burt Sugarman, Columbia Pictures co-heads Jon Peters and Peter Guber, Qintex, Rupert Murdoch, Sony, cable giant Tele-Communications Inc. and, again, Turner.

Last year, Kerkorian agreed to sell the studio to Qintex for $1 billion, a bid that was later topped by Rupert Murdoch, who dropped his offer when Qintex sweetened its bid to $1.5 billion. But financially strapped Qintex was unable to finance its aggressive bid and the deal fell apart, leaving Kerkorian without a buyer. (News Corp., which is controlled by Murdoch, is based in Australia, but Murdoch has become an American citizen.)

In January, Barbakow said Kerkorian was no longer seeking a buyer and pledged that MGM/UA would spend about $185 million, provided by both cash flow and bank lines of credit, to resuscitate its anemic film production and distribution operations.

Executives close to the situation said Wednesday that MGM/UA had actually been investigating the possibility of buying another entertainment company in order to speed its own growth in an industry that is undergoing an intense period of consolidation. But a conversation about a possible distribution agreement with Pathe several weeks ago led Parretti to make an offer to buy the Culver City company outright, officials said.

Barbakow said current MGM/UA officers will continue to run the company while the deal is pending, in sharp contrast to the agreement under which Qintex officers had run MGM/UA for months while they sought financing.

There is skepticism among some observers, given the history of both of the companies involved, as to whether the proposed deal will ever be completed, at least under the sketchy terms announced Wednesday.

Jeffrey Logsdon, an analyst with Crowell, Weedon & Co. in Los Angeles, said he is not sure whether Parretti has the resources to buy MGM/UA. “It’s very difficult looking at Pathe’s balance sheet or their cash flow to understand where in the world the money is going to come from to finance this transaction,” he said. He added that anybody buying MGM/UA “should have the capital to rebuild the studio, which would take a minimum of $500 million over the next two years.”

Still, Logsdon, says he is satisfied with the $20-per-share price because, he said, “if this thing had to trade on fundamentals, it would be trading at $7 to $8 per share or lower.”

One individual close to Pathe said: “These things have a way of not happening when it pertains to MGM/UA.” The executive, however, said he believed Parretti would not have trouble raising the financing for the acquisition by the deadline. “Don’t underestimate Giancarlo. He has his own brand of major financial clout,” the executive said.

Asked whether Warner Bros. might yet purchase some interest in the United Artists library, MGM/UA executive Berger said: “I think they probably have some interest in doing that.” But he said he did not know details of any arrangement that might be pending.

Barbakow said he plans to stay with the company for the foreseeable future. In addition to his $1-million annual salary, Barbakow could realize about $30 million from the sale of MGM/UA, according to the company’s proxy statement.

Although the companies said MGM/UA and Pathe would be run as separate entities, Barbakow acknowledged that Parretti could move in the future to merge the two operations. MGM/UA employs about 900 people, he said.

If that were to happen, it would be a psychological victory of sorts for Ladd, the highly regarded and well-liked former MGM/UA film head who left the studio in a bitter dispute with Kerkorian 18 months ago. Ladd now runs Pathe’s filmmaking division.

An executive close to Ladd said it was not yet clear what his precise role in the combined companies would be, although it appears likely he will oversee the movie operations, which include Pathe’s movie unit, along with MGM/UA’s Metro-Goldwyn-Mayer unit and the near-dormant United Artists unit.

Presumably Kerkorian would use proceeds from the sale to feed his expanding interests in Las Vegas, where he has announced plans to build a hotel and movie theme park, and elsewhere. “I think Kirk wanted to get away from the headaches and concentrate on his hotels, theme park and airline,” one MGM/UA executive said.

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