Pathe Makes First Deposit to Keep MGM Deal Alive

Pathe Communications Corp. on Friday cleared a hurdle in buying MGM Communications Co. by depositing the first of four $50-million monthly security payments for its proposed $1.27-billion takeover of the venerable film and television studio.

But major questions are still unanswered about where Pathe President Giancarlo Parretti will raise financing for the bid and how it will be structured. He faces a March 14 deadline, when Pathe’s tender offer for MGM/UA stock begins, to disclose his financing plan to the Securities and Exchange Commission.

MGM/UA said that, along with $75 million already pledged against receipts of three upcoming Pathe film releases, Pathe has now delivered a total of $125 million in security payments to MGM/UA. The receipts were extracted from Pathe as insurance in case the deal collapses--as happened last year with a proposed purchase of MGM/UA by Qintex Group--and would be returned to Pathe upon closing of the deal.

According to executives close to the situation, Parretti is trying to lash together a four-step transaction that would bring into the deal some big European media companies in exchange for equity or rights to MGM/UA product. At stake is not only another attempt by 72% owner Kirk Kerkorian to sell MGM/UA, but the already-tarnished reputation of Parretti, who has on more than one occasion seen his takeover attempts fizzle.

“This is very important to him,” said a close associate of Parretti with knowledge of the transaction. “He is aware that if he doesn’t go through with this one he is the laughingstock of the industry.”

Parretti is said to be in discussions with a number of European media concerns, including Britain’s Robert Maxwell, France’s Hachette, Italy’s Silvio Berlusconi and the Dutch company Polygram about investing in the MGM/UA deal. “They are good names,” said a source, referring to the companies approached by Parretti. “But there will not be American or Far East companies involved.”

Among the prospective European partners, “one or more will be a user as well as an investor,” said the source.

Parretti has long boasted about creating a global entertainment company along the lines of Rupert Murdoch’s News Corp., which has interests in various media on several continents. Murdoch, who last year bid for MGM/UA but pulled out when Qintex sweetened its bid, has not been mentioned as a possible Parretti partner.

Sources say Pathe will raise cash by liquidating certain real estate assets of its European affiliates, said to be valued between $300 million and $400 million, and selling off the U.S. domestic television rights to the MGM/UA library to Warner Bros. or another major studio. The real estate interests include Renta, a Spanish concern that owns office and apartment buildings, as well as theater circuits in Britain, France and the Netherlands.

Aurelio Germes, vice president and corporate controller of Pathe, said the real estate was worth “well over” $200 million and perhaps as much as $500 million. He said Pathe could structure a sale-leaseback agreement for its real estate similar to a deal earlier this year with Berlusconi for parts of its theater circuit.

Even if Parretti is able to assemble the complicated financing in a relatively short time, he still faces the problem of how to keep MGM/UA running on a competitive basis once the deal closes, currently scheduled for June 29.

“The problem is working capital,” said one executive close to the transaction, alluding to a projected $400 million needed to “ramp up” production over the next two years at the beleaguered studio. (MGM officials believe only $250 million would be needed.) Under the control of Kirk Kerkorian, MGM/UA has seen its slate of film and television production and distribution slow to a trickle and is sorely in need of an infusion of cash to allocate to movie and TV projects.

Credit Lyonnais Bank Nederland, the Rotterdam branch of the French banking giant that has financed Parretti’s rapid expansion, is taking a low-key role in the deal, sources said. Although Credit Lyonnais has publicly stated that it is curtailing its lending in the entertainment sector, Pathe officials said they have approached it and other European banks about a financing package.

The most complicated and potentially hazardous portion of the transaction is the discussions with Warner. A Warner spokesman said the company still maintains it has four years left on a five-year distribution deal signed last year with Pathe. Privately, senior Warner officials acknowledge there are conversations aimed at resolving the issue with Pathe and MGM/UA, which announced last Sunday that it had struck its own deal to distribute Pathe pictures.

One source said the negotiations between the parties were centering on Warner buying for “a slug of dough” the television distribution rights to MGM/UA’s film library, described as worth “hundreds of millions,” which could help finance the acquisition. Television rights would be more valuable to Warner than theatrical exhibition rights, since Warner’s parent, Time Warner Inc., could exploit the titles both on its pay television networks such as HBO as well as syndicate the titles to local television stations through its Warner Bros. Television unit.