Time Warner Sued by Pathe Over Loan for MGM/UA Deal

Pathe Communications Corp. sued Time Warner Inc. for $500 million in Los Angeles Superior Court late Thursday, charging that the New York media giant reneged on an agreement to loan Pathe $650 million toward the purchase of MGM/UA Communications Co.

Pathe’s suit accuses Time Warner of breach of contract, fraud, interference with contractual relationship and unfair competition. It also denies the claims of contractual violations made by Time Warner in a $100-million suit filed against Pathe 13 days earlier.

Pathe’s attorneys contend that Time Warner backed out of the MGM/UA deal without just cause. The suit alleges that Pathe fully abided by its agreement to bankroll half of the $1.2-billion price for MGM/UA, but that Time Warner later decided it wanted out of the deal.

The suit further claims that Time Warner sought to change the terms of the purchase agreement significantly after it was unable to find a bank willing to fund the $650-million loan.

From its corporate headquarters, Time Warner issued a blistering response to the suit, taking special aim at Pathe co-founders Giancarlo Parretti and Florio Fiorini.

“Pathe’s cross-complaint is just its latest attempt to divert attention from the facts--which are that Pathe breached its April, 1990, agreement with Time Warner, its theatrical distribution agreement with Warner Bros. and a video-rights distribution agreement with Warner Home Video,” the company stated.

“We intend to schedule the deposition of Messrs. Parretti and Fiorini immediately. We are confident that their depositions will expose how Pathe conducted itself in this matter and demonstrate who is telling the truth about what happened. The deposition will certainly prove who was unable to come up with the money.”

Time Warner’s withdrawal forced Pathe to obtain a four-month extension on its acquisition of MGM/UA, as it desperately seeks another financial backer. Pathe agreed to raise the price of the acquisition to $21.50 a share from $20, adding another $100 million to the cost. As part of the revised deal, stockholders will be paid $4 per share on July 20.

The stalemate between the former deal-mates has generated widespread skepticism over Pathe’s ability to complete the transaction. But Pathe Co-President Parretti reportedly told a Paris press conference Monday that he intends to close the acquisition by Sept. 21, a month ahead of time. Parretti did not say where he will find the backing needed to accomplish his goal, however.

In its June 29 lawsuit against Pathe, Time Warner accused Pathe of violating the agreement that the two sides reached in April. Time Warner charged that Pathe acted as if the agreement “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.” In particular, Time Warner said Pathe’s Parretti sold video and film rights twice, to both Time Warner and MGM/UA.

In its counterclaim, Pathe contends that Time Warner tried to change the terms of the loan because it was unhappy with existing contractual restrictions on the United Artists film library. Time Warner was to receive the library as collateral for its financing.

Pathe said Time Warner failed to help it find a $200-million loan to fund production costs, as agreed to, and refused to accept an independent valuation of the Pathe/Cannon film libraries, insisted on other conditions Pathe could not meet and “knowingly put Pathe at risk of losing” a $200-million non-refundable deposit made to MGM/UA.

In an attached submission, Pathe also formally denied all of the assertions made against it in Time Warner’s suit.