MGM Sinks Clause Into Its Cable Channel Purchase

Metro-Goldwyn-Mayer Inc., which is buying a 20% interest in four cable-TV channels from a unit of Cablevision Systems Corp., has the right to sell back the stake if the venture doesn’t meet profit goals.

Santa Monica-based MGM, owner of one of the world’s biggest film libraries, last week agreed to pay $825 million for the one-fifth interest in American Movie Classics Co., owner of WE: Women’s Entertainment, and Bravo, owner of The Independent Film Channel, all owned by Cablevision’s Rainbow Media Holdings Inc.

Terms of the investment include a put option giving MGM the right to sell its stake back to Rainbow in 2006 if the venture falls short of projections for operating income for the years 2002 through 2005, according to filings by MGM and Cablevision with the Securities and Exchange Commission.

“We are going into this alliance with confidence that it will grow, but (the put option) is a prudent business decision and a form of insurance,” said MGM spokesman Craig Parsons.

MGM can exercise the put if the channels’ earnings before interest, taxes, depreciation and amortization, or Ebitda, “are less than 76% of the currently forecast amounts,” Cablevision said in its SEC filing. The measure to be taken is “cumulative” Ebitda over the 2002-2005 period.

The filings didn’t provide the profit projections, and the MGM spokesman said the figures won’t be made public.

An MGM sale back to Rainbow would be priced at “fair market value,” the Cablevision filing said. Parsons said the value would be determined by investment bankers in 2006, if necessary.

Rainbow would have the choice of paying cash, a promissory note, shares of Cablevision, or its own tracking shares, according to Cablevision’s filing.

Bethpage, New York-based Cablevision, the top cable-TV provider around New York City, has proposed to issue shares tracking the performance of the Rainbow unit.

Cablevision shareholders will vote on the plan at a special meeting Feb. 16. The company’s SEC filing was a proxy statement related to the vote.

Aside from MGM’s option to sell back the stake in 2006, MGM and Rainbow both have rights if the other seeks to sell its interest to a third party at any time. Both companies agreed to “consult with” the other before selling a stake, the Cablevision and MGM filings said.

MGM also can “tag-along” on any sale by Rainbow, and Rainbow can “drag-along” MGM in such a sale, although Rainbow can’t compel MGM to sell if it’s less than a year since the initial investment and for a price less than MGM paid, the filings added.

MGM said it would fund its investment by making private stock sales and possibly borrowing.

In a separate SEC filing today, the company’s controlling shareholder, Kirk Kerkorian, said he would buy $325 million of convertible preferred stock to help finance MGM’s purchase.

Cablevision shares rose $1.78 to $85.60 today. The shares have gained 30% over the past six months.

MGM shares, down about 20% in the last half year, rose 1 cent to $20.51.