Pathe’s Quest for MGM/UA Hits Big Snag : Entertainment: Time Warner, the firm’s chief backer, is insisting that it come up with $600 million of equity in unborrowed funds.

In a stunning blow, Pathe Communications Corp. has been told it cannot rely on borrowed funds to complete its planned $1.2-billion acquisition of MGM/UA Communications Corp.

Time Warner Inc., Pathe’s chief financial backer, on Tuesday said that Pathe must abide by the terms of a financing agreement that requires the company to contribute $600 million in equity.

“The agreement was . . . that there would be a minimum of $600 million in equity from Pathe,” said a Time Warner spokeswoman. “And that condition still hasn’t been met. That’s the focus of discussions. . . . The deal signed in April remains the deal we have today.”

The decree casts serious doubt over Pathe’s ability to complete the acquisition and almost certainly means that Pathe will require an extension on Saturday’s deadline for closing the deal.

Discussions between the two sides continued Tuesday as Pathe struggled to come to terms on a plan that would give it control of one of Hollywood’s most legendary film companies.

A Pathe spokesman maintained that the equity question can still be resolved. But Time Warner described the differences over the deal’s financial structure as a major obstacle.

Under the April agreement, Time Warner would loan $650 million toward the deal, with Pathe providing the balance. In return for its financing, Time Warner would receive distribution rights to the United Artists film library and future Pathe and MGM/UA releases.

Earlier this month, however, Pathe announced an amendment to the agreement, saying the lion’s share of its funding would come from a patchwork of short-term loans, asset sales and the possible resale of some MGM/UA stock. Sources close to the deal said Time Warner initially indicated that it would accept the conditions. As the deadline for closing the deal approached, however, Time Warner reportedly had a change of heart, fearing that Pathe was taking on too much debt.

On Monday, with rumors of imminent collapse surrounding the deal, Beverly Hills-based Pathe announced that it might seek an extension on MGM/UA’s deadline to complete the acquisition.

Pathe spokesman Craig Parsons said Pathe does not consider its share of the funding to be in the form of a loan, since most of the money is coming from companies affiliated with Pathe.

“Pathe is saying we’re paying (the money) back in shares of stock, so this is not a loan in the conventional sense,” Parsons said. “It could be considered equity.”

Parsons also maintained that Pathe has already put $200 million in capital on the table as its down payment for MGM/UA. But a source close to the deal said Time Warner does not consider the $200 million as equity, since much of it was derived from outside sources.

“It’s not in the form of a capital contribution,” the source said.

Jeffrey Logsdon, a securities analyst with Crowell, Weedon & Co., said the deal may still survive. But he added that Time Warner’s financial requirements could pose serious problems for Pathe. “If it has to be in pure equity, that’s a substantial barrier,” Logsdon said.

At MGM/UA, meanwhile, employees have become increasingly concerned about the company’s future. One executive said that the hundreds of employees who could be laid off if the deal is completed should know more about their futures soon.

“We hear the deal is falling apart, but I think this week will tell it all,” said the MGM/UA staffer, who asked not to be named. “Normally deals have momentum, either positive or negative. But this one just seems to keep switching.”