The End Of MGM As We Know It?

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The End Of MGM As We Know It?

Post by silversurfer19 on Sat Sep 26, 2009 2:29 am

Deadlinehollwood is reporting big trouble for MGM, and it could lead to bankrupcy if they're not careful. This puts movies like Bond and The Hobbit in jeopardy. Here is the story:

I've collected several knowledgeable accounts of what happened during yesterday's multi-hour contentious MGM conference call with bondholders who were "very loud and very upset". Here's why:

The call was for the benefit of the lenders, and MGM management made the presentation along with Stephen F Cooper, that Zolfo Cooper restructure specialist. MGM made a desperate plea for money because the studio had missed its numbers and was going to be out of funds very soon. "The implication was that it's teetering on bankruptcy," one source told me. MGM said it needed $20M in short-term cash flow to cover overhead, and an additional $150 million to get through the end of year and continue funding its projects, and to start Peter Jackson's Hobbit.

Some say the call lasted 6 1/2 hours. Others said it lasted 2 1/2 hours with lenders, and then the lenders themselves had a conference call that lasted another 2 hours. After the MGM presentation, several bondholders spoke, "and they were irate", an insider tells me. True, this regularly happens on bad news calls like this. But in this case the creditors who hold MGM's term loan debt blame Harry Sloan for MGM overpromising and then missing its numbers, which was discussed during the summer and why he was removed as CEO. "They're not happy that Sloan let the company go in this direction but they understand what’s going on. It’s unfortunate, but they get it that the company is in a distressed situation, and they have to figure out an action plan moving forward," a source explains to me.

The conference call was planned to present the creditors with a request, or forebearance, to waive interest payments on MGM's $3.5 billion killer debt until February 2010. Because if MGM doesn’t have to make those interest payments, then the studio can afford to use that money instead to fund the production slate. The bondholders couldn’t understand why the equity holders wouldn’t fork over the dough. But the equity holders aren’t interested in writing a check because they understand that their equity is way under water already, and there's no upside for them. So, in essence, the equity holders have already written off their investment in MGM. But the bondholders have that $3.7 billion of nominal debt currently trading in the secondary market at about $.55–$.57 cents on the dollar. It's been trading in this low $.50s range for a while, so the marketplace is saying that the company is not worth more than $.56 times $3.7 billion. (And that's probably high.)

As a result, the bondholders are not in a great situation and therefore not feeling generous. On the other hand, if MGM were sold off today, most investment bankers don’t think it would fetch more than $1.5 billion to $1.75 billion at auction. This would mean that bondholders would recover less than $.50 on the dollar. This would be an even worse outcome.

So the bondhholders said to MGM, in essence, that they were going to let the studio go bankrupt and collect their money since they'd be first in line to get paid. But Cooper explained that this would be the worst possible outcome for the creditors and the company. Because if MGM were forced into bankruptcy, then it would lose James Bond and the studio doesn't think it can stay alive without 007. Also, a lot of other issues would surface that would tremendously hurt MGM.

Also, if MGM goes through bankruptcy, that's a very expensive prospect (where only the lawyers get rich), and extremely disruptive (since who would do business with MGM in the interim) and won’t get the creditors what they want which is their money back. It's more than simply MGM losing Bond. The studio could lose a lot of other franchises.

I can’t tell you whether the bondholders will agree to the forebearance or not. It requires a 51% approval vote. But some of the smart people I've contacted do think the creditors will eventually realize that a restructuring of MGM outside of the bankruptcy process is probably the best course right now.

So what's next? MGM now has to formally ask for forbearance, and the bondholders formally respond.

I've always been a big fan of MGM, they are one of the old classic studios who have released some of my favourites. It's a shame we have been seeing a number of studios going under recently, and this is one of the big ones. Got to ask though, surely a studio as big as MGM should be able to get decent accountants in to make sure this kind of thing doesn't happen?

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Re: The End Of MGM As We Know It?

Post by Buscemi on Sat Sep 26, 2009 2:46 am

First of all, don't ever take Deadline Hollywood Daily seriously. It is a site headed by lying hatemongers, run by lying hatemongers and frequented by lying hatemongers.

Second, they will most likely survive this ordeal. Back in the 1960's and 1970's, Fox teetered near bankruptcy twice but came back strong with two certain titles (The Sound Of Music and Star Wars). All that they need is a good person to run the company and some good titles. Or give Tom Cruise more legroom.

I could also see a possibility where Liberty Media buys MGM and merges the company with Overture. The head of Overture, Chris McGurk, used to be one of the higher-ups at MGM and helped spearhead some profitable films for the company (such as Legally Blonde, The Thomas Crown Affair, Hannibal, Stigmata, Barbershop and two James Bond films).

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Re: The End Of MGM As We Know It?

Post by BanksIsDaFuture on Sat Sep 26, 2009 2:50 am

Well, MGM has the big Tom Cruise/Cameron Diaz movie coming next summer so that can't hurt.

But, movies like Fame will not help their situation at all.
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Re: The End Of MGM As We Know It?

Post by Buscemi on Sat Sep 26, 2009 2:52 am

Actually, Fox is releasing that film (now titled Wichita, though the film has nothing to do with Wichita).

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Re: The End Of MGM As We Know It?

Post by BanksIsDaFuture on Sat Sep 26, 2009 3:39 am

It seems weird that Tom Cruise would do a movie for another studio instead of setting it up at his own studio, UA/MGM. I'm sure it's related to the money issue though.
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Re: The End Of MGM As We Know It?

Post by W on Sat Sep 26, 2009 4:23 am

Hell, hire us all for $500,000 a year split evenly. We pretty much know what will sell and what won't. We'll set 'em straight.

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Re: The End Of MGM As We Know It?

Post by undeadmonkey on Sat Sep 26, 2009 10:20 am

I want to see The Hobbit! I'm sure they would make a lot of money off of that!
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Re: The End Of MGM As We Know It?

Post by W on Sat Sep 26, 2009 10:45 am

I wouldn't worry about that, it would easily be gobbled up by another company if MGM went completely bankrupt.

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Re: The End Of MGM As We Know It?

Post by undeadmonkey on Sat Sep 26, 2009 11:20 am

hmm, didnt think about that. Yea, I suppose that would happen.
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