Sony-MGM Talks May Be Getting Serious

Metro-Goldwyn-Mayer Inc. on Wednesday postponed by nearly seven weeks its annual shareholders’ meeting, a signal that talks with Sony Corp. about a potential acquisition of MGM for $5 billion may be on the verge of accelerating.

People close to the situation said the talks had bogged down over two issues. One was the insistence of Sony executives that MGM deal with them exclusively for at least a short period of time. The second sticking point was the conditions under which Sony would be given access to proprietary data from MGM involving areas in which the two companies compete head-to-head -- specifically DVD distribution.

As of late Wednesday, both issues appeared close to being resolved, sources said.

Even so, there are no guarantees that Sony and MGM will reach an agreement. On Wednesday, one person close to the talks said it was still “a longshot” that Sony would complete the acquisition.

The postponement of MGM’s annual meeting follows an April 26 letter from Sony’s top U.S. executive, Howard Stringer, to MGM Chairman and Chief Executive Alex Yemenidjian, saying that Sony was making an “offer” of $5 billion for the Los Angeles studio, contingent on resolving several key issues. Among them: the handling of proprietary data and exclusivity.

Once the issue over the sensitive data is resolved, sources said, Sony can move to the second phase of its due diligence, which involves a more detailed evaluation of MGM. Meanwhile, granting Sony exclusivity would limit the possibility of a bidding war by shutting out other potential suitors such as Time Warner Inc., which has also expressed an interest in MGM and its rich film library.

Stringer’s letter outlined that Sony and three partners, DLJ Merchant Banking, Texas Pacific Group and Providence Capital Inc., would provide a combined $1.5 billion in equity financing. Additionally, Sony investment banker Credit Suisse First Boston would provide $3.5 billion of debt financing, according to people outside of MGM and Sony who are familiar with the contents of Stringer’s letter.

Reuters first reported certain aspects of the Sony-MGM talks, including participation by Texas Pacific and Providence, last month.

In a statement, MGM said it was moving its shareholders’ meeting from May 12 to June 29 because it was “considering strategic alternatives” that it needed more time to evaluate. MGM did not comment further, and Sony declined to comment.

In recent years, MGM has had a series of near-misses on the acquisition front. It was in talks to be combined with the likes of Sony, Time Warner and Cablevision Systems Corp., only to see the deals evaporate. In those cases, price and management issues were the problems.

People close to the latest MGM talks cautioned that details still needed to be worked out between Sony and its partners. What’s more, Sony officials in Tokyo could nix any deal. That’s what happened in 2001 when Sony executives in the U.S. discussed merging with MGM.

However, the sources familiar with the April 26 letter said that Stringer had been authorized by Tokyo that month to pursue an acquisition “up to $5 billion.”

Michael L. Savner, an analyst with Banc of America Securities, said the talks now appeared to be less about the price to be paid for MGM and more about structuring a deal in a way that would be acceptable to Sony and its partners.

“My gut feeling is that they are within range,” Savner said. “I don’t think you’ll find MGM walking away.”

The potential sale comes as MGM is on the verge of paying its stockholders an $8-a-share special dividend totaling $1.9 billion, including about $1.4 billion for majority owner Kirk Kerkorian. MGM is borrowing $2.4 billion to help pay the dividend. Part of the $3.5 billion to be provided by Credit Suisse is earmarked to pay off that debt, sources said.

Savner noted that combining the two companies could save significant costs, including $75 million to $100 million on corporate overhead alone.

A deal by Sony to buy the Century City-based studio would provide a profitable exit from Hollywood for the 86-year-old Kerkorian, who controls 74% of MGM and has owned the studio three times dating back to the late 1960s.

Kerkorian, who most recently bought MGM for $1.3 billion in 1996 and later provided further infusions, is believed to have about $3 billion invested in the company before payment of the special dividend.

For Sony and Stringer, an acquisition would mean snapping up one of Hollywood’s biggest libraries, about 4,000 films and 10,000 hours of television, at a time when such collections are considered golden. MGM’s library boasts the lucrative James Bond film series, the “Pink Panther” films and such Oscar-winning movies as “Rocky,” “Rain Man,” “Silence of the Lambs” and “Midnight Cowboy.”

It is that collection of titles that is driving the interest of Sony, where Stringer has long preached that the company can mesh its electronics advances with its films and TV shows. An immediate payoff for Sony would be a new stream of DVDs, which have been hugely profitable for the Hollywood studios.

With high-definition TV technology gradually replacing conventional video, viewers may restock their home collections yet again, just as they have replaced videocassettes with DVDs. In addition, the cable TV companies’ rollout of video-on-demand and the launch of downloadable video services bode well for owners of large film and TV libraries.

The MGM talks have surfaced as Sony is grappling with earnings that dropped 26% last year because of lower profit from its electronics, video game and moviemaking businesses, as well as restructuring costs. Sony’s management announced plans last fall for a massive corporate restructuring that included slashing 20,000 jobs, or more than 12% of its global workforce.

Sony’s movie operation has produced mixed results at best over the last year, with such hits as “13 Going on 30,” “50 First Dates” and “Something’s Gotta Give” amid such costly misses as “Gigli,” “The Missing” and “Basic.” The studio is having a tough time living up to its record-breaking year in 2002, which was powered by “Spider-Man.” The highly anticipated sequel, “Spider-Man 2,” is set to open June 30.

MGM, considered one of Hollywood’s smaller studios, also has had its ups and downs at the box office. But it still boasts one of the industry’s most lucrative movie franchises in the James Bond series. The next installment is scheduled for release in 2005.

MGM recently has adopted a strategy of making low-cost movies that ideally can spawn low-cost sequels, such as its “Barbershop” franchise and the “Jeepers Creepers” films. The company no longer owns such classic titles as “Gone with the Wind,” “The Wizard of Oz” and “Singin’ in the Rain,” which were bought by mogul Ted Turner in the 1980s and are now owned by Time Warner.

MGM’s managers have made it clear for some time that the studio needs to link up with another company because its competitors are now media conglomerates capable of exploiting their films and TV shows over a variety of movie, broadcast and cable divisions. In addition, pure film studios are at the mercy of the box office, lacking operations that can offset dry periods.

To that end, MGM last year made a cash bid of $11.5-billion for Vivendi Universal’s U.S. entertainment assets, which eventually were sold to General Electric Co. and its NBC unit. Soon after, MGM made overtures to buy Sony’s film and TV units for $8 billion last August, but were rebuffed.

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Times staff writer Jon Healey contributed to this report.