MGM Selling Cable Assets to Cablevision

Metro-Goldwyn-Mayer Inc. is pressing the off button on cable TV.

Stymied in trying to bulk up in cable investments over the last two years, the Santa Monica-based studio said Monday that it was divesting its 20% stake in three Rainbow cable networks -- AMC, the Independent Film Channel and WE: Women’s Entertainment -- by selling the interests to partner Cablevision Systems Corp. for $500 million.

MGM would get $250 million in cash when the sale closes, which is expected in the third quarter, and a note worth another $250 million -- which may be paid in Cablevision stock -- that matures in five months. The proceeds would cleanse the company’s balance sheet at a time when it is bidding for Universal Studios and other entertainment assets owned by Vivendi Universal.

Cablevision, meanwhile, would consolidate ownership of its three national cable channels at what analysts consider to be a good price in the current cable market. And the deal would smooth the way for the Bethpage, N.Y.-based firm’s participation in Edgar Bronfman Jr.’s bid to buy the Universal assets.

MGM would book a noncash loss of $93 million from the sale. But Chief Executive Alex Yemenidjian said the deal would convert holdings that “the financial community gave us little credit for” into $2 a share in cash.

The proceeds would push the studio’s cash to a level higher than its debt. “The opportunity to become debt-free was irresistible,” Yemenidjian said.

Although Yemenidjian didn’t refer specifically to the Vivendi deal in announcing the sale, he did hint that the proceeds would help, saying, “We now have more flexibility to either allocate capital to growth opportunities or to return capital to our shareholders.”

MGM and its controlling shareholder, billionaire Kirk Kerkorian, are bidding more than $11 billion for control of Vivendi Universal’s theme park, film and TV operations, which include some cable assets.

For Cablevision, acquiring MGM’s minority position would allow a “cleaner” bid for the Vivendi assets, according to a source familiar with the deal.

The cable company is joining Bronfman, who previously headed Seagram Inc., Universal’s former parent, in a bid that involves Cablevision merging its cable channels with Universal’s USA and Sci-Fi channels. Before the sale, MGM was in the awkward position of effectively holding a stake in that bid while also bidding for the Vivendi assets.

MGM paid $825 million for a 20% stake in Rainbow in 2001, hoping to use it as a steppingstone to expand into cable and eventually build its own MGM channel. That investment included the Bravo channel, which NBC bought in November for $1.25 billion in cash and stock. MGM got $250 million in proceeds for its stake.

But Cablevision resisted MGM’s broader efforts that would have allowed it to gain control, including one that would have given MGM the AMC channel through a swap of interests in the other channels. With its 20% stake, MGM was stuck with a passive, illiquid investment that it finally decided wasn’t worth keeping.

“MGM punted on this because they would never get management control, and never would get full 100% ownership,” said David Miller, an analyst with Sander Morris Harris Group in Los Angeles.

Media analyst Jeffrey Logsdon of Gerard Klauer Mattison in Boston added that MGM’s stake had provided no special clout in an industry dominated by such powerhouse cable networks as ESPN, MTV and HBO.