One Billionaire’s Looking for an Out, the Other for a Better In

Call it “Dances With Wolves: The Sequel.”

Just imagine two crusty old billionaires like John Kluge and Kirk Kerkorian circling each other trying to extract the last nickel out of a deal.

The two rough-and-tumble investor-traders several weeks ago initiated negotiations over the entertainment assets of Kluge’s Metromedia International Group. This week, their respective representatives have been in Los Angeles locked in intense talks that could see Kerkorian acquire most of those assets to beef up his Metro-Goldwyn-Mayer studio.

The deal could still fall apart, of course, but various Wall Street and industry sources say the parties are simply dotting the I’s and crossing the T’s.

“These guys are coming down the home stretch,” said Furman Selz’s Frederick Moran, one of the analysts who follows Metromedia most closely. “I feel confident that there’s a high probability that Metromedia will be able to sell its entertainment assets soon.”

Moran and other sources say the deal-- thought to be in the $500-million-to-$600- million range and about half cash, half debt--includes the 2,200-title movie and TV libraries and the production and distribution operations of Metromedia Entertainment Group’s Orion Pictures, the Samuel Goldwyn Co. and Motion Picture Corp. of America. Last year, Kluge merged the entities into what he hoped would evolve into a mini-major studio.

The deal would not, however, include Metromedia’s art house Landmark Theaters chain, something analysts say is a jewel worth more than $60 million and an easy sell to any number of companies.

If the deal happens, it would bail Kluge out of Hollywood, which he first entered more than a decade ago as a favor to his late friend Arthur Krim, Orion’s co-founder. Kerkorian would risk even more on his ambitious plans for MGM.

For Kerkorian--who last July led a group of investors including Australia’s Seven Network to buy MGM (for what would be his third time) for $1.3 billion--the obvious lure is library, library, library.

The Orion and Goldwyn libraries include such titles as “Dances With Wolves,” “The Silence of the Lambs” and “Much Ado About Nothing.” MGM’s 4,300 titles include the James Bond and Pink Panther series, among others. The combination would create one of the world’s largest catalogs.

That could benefit MGM in the short term, by driving its cash flow, and in the longer run, by dressing it up for an initial public offering and a future sale. The value of entertainment libraries is continuing to rise as global distribution outlets flourish amid a swelling world economy.

Some say that if Kerkorian pays the kind of price that’s being bandied about--in the $550 million range--he’s overreaching. “I’m baffled by it,” says one industry insider, noting that Metromedia’s own book value on the library is $240 million.

“That means you’d have $300 million of good will that has to be written down over 10 or 20 years, which would put a $15-million-$30 million-a-year charge against earnings and have a depressing effect on the P&L; . . . it doesn’t make sense.”

Industry analyst Jeffrey Logsdon said that at such a premium, MGM would be better off investing in new productions. The studio has been struggling to get back on its feet after halting production last year while it was on the sales block.

“Those numbers make no sense from a financial standpoint,” Logsdon says. “MGM already has a big enough library. What Wall Street is looking for is the ability to make money on current production activities. That’s how you make the library worth something. It’s not just how many titles you have.”

Although he stressed that the Street is “not going to be impressed by creating the illusion of value,” he agrees that a library buy at the right price “would make sense.”

As for assessing library values, Moran’s view is: “Beauty is in the eyes of the beholder . . . and there’s a real scarcity value.”

Another Wall Street analyst, who didn’t want to be identified, says: “MGM alone is not an interesting enough story. From an IPO standpoint, a library is what captures investor attention.”

MGM has jump-started its production with the next James Bond installment, “Tomorrow Never Dies,” starring Pierce Brosnan and intended for release this Christmas, and “Red Corner,” starring Richard Gere and due out in November.

Why at 79 Kerkorian wants to take another run at Hollywood is more a matter for psychologists than Wall Street analysts.

For the 82-year-old Kluge, unloading the entertainment assets of the publicly held Metromedia would allow him to focus exclusively on the company’s core business of modernizing communications systems in Eastern Europe and Asia.

Kluge has been under tremendous pressure from his shareholders to boost Metromedia stock price, which has been on a slide since 1995, when it hit a high of $19.50. Last Friday, the stock hit a low of $7.44. But since a report first surfaced a week ago Wednesday in the New York Post that talks were underway, the stock has been on the rebound. It closed up 37.5 cents at $9.50 on Thursday on the American Stock Exchange.

If a deal can be consummated, Wall Street experts believe the stock will rise substantially. But, as Moran points out, “investors are still skeptical the deal will go through.”

Analysts say Metromedia would be worth a lot more money as a pure play in telecommunications, unclouded by the entertainment assets.

Kluge--who served as a white knight to Krim in the 1980s when he battled Sumner Redstone for control of Orion--initially had intended to build the Metromedia Entertainment Group into a substantial player in the movie business, but hasn’t given it the time to grow. In late 1995, he paid $32.5 million for Motion Picture Corp. of America, which mostly produces low-budget films and had a huge hit in Jim Carrey’s “Dumb and Dumber.” Several months later he doled out more than $115 million for Goldwyn.

Last year, he kick-started production at Orion and folded in Motion Picture Corp. of America, headed by founders Brad Krevoy and Steve Stabler, giving them five-year contracts.

It’s still unclear whether those operations, which some consider redundant, others, complementary to MGM, would fit into a merged company, or if they would be liquidated and the executives who have been kept completely in the dark about the sale--paid off.