Time Warner Suit Threatens MGM/UA Deal : Entertainment: Pathe Communications is accused of violating its agreement with the New York media giant over the acquisition of the studio.

Time Warner Inc. filed a $100-million lawsuit against Pathe Communications Corp. late Friday in a move that threatens to block any bid by Pathe to complete its proposed $1.3-billion acquisition of MGM/UA Communications Co.

The suit, filed in Los Angeles Superior Court, accuses Pathe of violating an agreement under which Time Warner was to provide $650 million in financing for the MGM/UA purchase.

The suit also claims that Pathe is using a revised merger bid, which was announced last week, as “a smokescreen” to obscure its inability or unwillingness to honor its agreement with Time Warner.

A Pathe spokesman said he hadn’t seen the suit and declined to comment.

Time Warner’s insistence that Pathe honor the companies’ financing agreement appeared to jeopardize any effort by Pathe to find alternative financing for its new $21.50-a-share bid. Under an agreement with MGM/UA majority shareholder Kirk Kerkorian, Pathe is to prepay $4 a share to MGM/UA stockholders, while it seeks financing to pay the $17.50-a-share balance by October 23.

Under its agreement with Pathe, Time Warner was to receive long-term distribution rights to MGM/UA and Pathe films in return for its $650 million in loan guarantees.

In the suit, Time Warner said Pathe “acted as if the contract gave Pathe a one-way option to decide which of its obligations it would honor, which Time Warner rights it could ignore, and which conditions it would satisfy.” The company also accused Pathe of double-selling video rights to its own films both to Warner Home Video and to MGM/UA’s home video arm.

Individuals close to Warner said a key problem was Pathe’s inability to provide $600 million in equity and film production funds to match Time Warner’s contribution.

“The reason for that requirement was so that this deal would not be done shabbily,” one individual close to Warner said of the requirement. “This (merger) was not to result in a highly leveraged company. It was to protect the shareholders of MGM/UA, of Pathe and of Time Warner. More importantly, it was to protect the filmmaking community. Those groups of people would have been hurt if the company failed and was dismantled.”

Pathe had asked Time Warner to accept a patchwork of $370 million in loans, advances and other funds in fulfillment of its funding requirement. The lawsuit said Pathe had failed “to obtain even minimally acceptable legal opinions and a satisfactory solvency opinion.”

Neither Kirkorian nor MGM/UA was named as a defendant in the suit, and MGM/UA Chairman Jeffrey Barbakow declined to comment on it.

One of the Time Warner associates said a key concern of the company in filing suit was “to make sure the assets” of MGM/UA weren’t sold or committed to others in violation of Time Warner’s financing agreement.

In its suit, Warner claimed the right to distribute forthcoming Pathe films, including “Quigley Down Under” with Tom Selleck and “Russia House” with Michelle Pfeiffer and Sean Connery, even though MGM/UA executives have privately said the companies were going ahead with plans to distribute the movies through MGM/UA.

According to the lawsuit, Pathe’s April 9 agreement with Time Warner required it to come up not only with $600 million in acquisition funds that included no borrowings, but an additional $200 million in production loans. “They have no production funding,” an individual close to Time Warner said of Pathe on Friday.

The lawsuit also claimed that Pathe Co-President Giancarlo Parretti misled Warner Bros. President Terry Semel into believing that a group of Pathe films was available for distribution by Warner’s video division when in fact the films had already been committed to MGM/UA.

In a further claim, the suit accuses Pathe of “starting a deceptive public relations campaign of falsely blaming Time Warner (for failure to complete the MGM/UA bid) and thereby trying to mask its own inability and refusal” to live up to its agreements.

The suit asks for at least $100 million in damages and for punitive damages of an unspecified amount.