Murdoch May Trump Other Bidders and Walk Off With MGM

Although PolyGram and Morgan Creek Productions appear to be in a dead heat to acquire the venerable Metro-Goldwyn-Mayer studio as the final bidding draws to a close, News Corp. media mogul Rupert Murdoch should not yet be counted out.

“Rupert is the only wild card and he’s a pretty powerful wild card,” said one person involved in the sale. “He could trump everybody.”

Another source who knows Murdoch concurred: “I certainly wouldn’t be surprised to wake up and learn that Rupert bought MGM--particularly given the results of ‘Independence Day,’ ” the current box-office hit released by the News Corp.-owned Twentieth Century Fox studio. “It reminds him of the upside of the movie business.”

Murdoch, one of a few serious remaining bidders, has coveted MGM since making a run for the studio seven years ago. And he needs the 1,559-title library now more than ever, to fulfill his ambitious plans of covering all reaches of the globe with satellite television services.

“It would be of great value at the right price for an end user like us,” said David Evans, who oversees the six satellite TV operations of News Corp.

Although Murdoch has owned one of Hollywood’s major studios, Fox, since 1985, he could use even more product for a bevy of new channels. In the last several months, News Corp. has announced plans to launch satellite services with scores of channels in Germany, the U.S. and Japan. These will complement its successful BSkyB services in Britain, its StarTV network in Asia and one in Latin America.

In addition, he could use MGM’s films on Fox’s fX cable channel, on the TV network and on his cable channels in Australia.

Back in 1989, Murdoch thought he was the new owner of MGM, until the studio was sold to a higher bidder, Italian financier Giancarlo Parretti. Murdoch is said to have had a handshake deal with then-MGM owner Kirk Kerkorian with a bid of a hefty $1.35 billion.

He is thought to have bid about $1 billion in cash this time around, at the bottom of a bidding range that originally extended to about $1.3 billion.

What Murdoch and other bidders covet is MGM’s post-1986 library and its United Artists catalog, which includes 17 James Bond movies, five “Rockys” and eight “Pink Panthers” as well as “Annie Hall” and “Raging Bull,” plus several thousand hours of television programming.

The value of the existing library has been tarnished because Parretti, to raise cash, sold off rights to home video distribution to all MGM/UA films through the year 2003. The arrangement is a further deterrent to would-be buyers because it could be interpreted to mean the new owner of MGM might be forced to distribute its own home video product through the same MGM distributor: Warner Bros.

Warner management has told MGM bidders that it plans to enforce that agreement.

This has been a thorny issue for News Corp. and PolyGram. It gives an edge to Morgan Creek and another bidder, New Regency Productions, which already distributes through Warner Bros.

News Corp. and PolyGram have reportedly asked for indemnification from that contract, meaning that if a court ultimately decides that Warner has the right to distribute the new owner’s movies, MGM seller Consortium de Realisation, an affiliate of French state bank Credit Lyonnais, would be financially responsible for compensating the buyer at an agreed-upon value of those rights.

Whereas PolyGram could use MGM’s distribution and production capabilities to bolster its smaller-scale operation, News Corp. presumably would shut down the studio and just exploit the library. The question is: at what price?

It is unclear whether Murdoch--or any other bidders--upped bids by 2:00 EDT Thursday, the new deadline imposed by investment banker Lazard Freres & Co. (which is handling the sale for CDR). Bids were originally due June 24, though PolyGram submitted days later after getting board approval from its Dutch parent, Philips. Some sources said Lazard, which had originally expected to get more than $2 billion for MGM, set the new deadline in hopes of getting a higher price, although the time frame may have been modified in part to give everyone an equal chance to adjust his or her final bid.

A source close to the situation said there were “meaningful improvements” made on select bids and that Lazard expects to move forward as quickly as possible to complete a transaction. The investment bank could begin exclusive talks with the favored bidder as early as today and a deal could be concluded within a couple of weeks.

It’s believed that Morgan Creek worked into the wee hours of the morning to modify its bid.

PolyGram, long considered the front-runner for MGM, may have built some flexibility into its original bid of between $1.2 billion and $1.3 billion in anticipation of another round of bidding, suggested a source close to the company.

Another source involved in the sale said New Regency was sticking to its original take-it-or-leave-it bid of slightly more than $1 billion and never intended to revise upward.

It was unclear late Thursday whether MGM Chairman Frank Mancuso had yet pulled off a financing arrangement that would help him with a management-led buyout of the studio. Sources were skeptical such parties as Australian TV broadcaster Seven Network had given him enough backing.

It is difficult to measure Murdoch’s appetite. He entered the fray later than the other bidders and at one point was thought to have dropped out completely only to shortly resurface with a fully-financed offer.

“I think he’s low-balling everybody,” said a Murdoch ally. “He’ll position himself as if he doesn’t care if he gets it or not, then he’ll make a decision at the last minute. He doesn’t listen to anybody but himself.”

Those who know him say Murdoch can be tightfisted in one instance and a spendthrift in another. He has been known to overpay for strategic assets such as the television rights to the National Football League, for which he paid $1.58 billion over four years, outbidding CBS by about $400 million.

“He’s an acquirer and he’ll overpay--like he did for the sports package--if he thinks it’s ultimately good for the franchise,” said a former colleague.

However, Murdoch could easily walk away. “This is not a desperate man,” suggested a source.

Wall Street sources say MGM is overvalued as it is. Most agree that the company is worth no more than $700 million. Unlike any of the other major studios, its business is limited to its library revenue (estimated at about $70 million to $75 million a year) and the production and distribution of movies. “MGM cannot support out of cash flow the debt and overhead it would cost a new buyer,” said a financial source. Experts estimate it could cost a buyer as much as $700 million to $750 million a year to produce and market a slate of films if the MGM operation were kept running.