MGM Lion Roars, and Gets a Break From Debt Payments

MGM Studios
MGM Studios

MGM, the debt-laden privately held film studio, has been given a temporary reprieve on its interest payments. Thursday night the studio released a statement saying its lenders will allow the company to skip interest payments due last month, this month and next month. They will have to pay up on December 15 when the agreement expires. It's no surprise; take a look at the box office receipts from last weekend: the company's latest film, "Fame," its first production this year, didn't fare as well as hoped, bringing in only $11.5 million at US theaters. The studio needs a jolt of revenue from new movies to add to its bread and butter - DVD and TV revenue from its library of 4,000 films.

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The studio has $3.7 billion in debt due in 2012, which creates about $250 million in interest payments a year. On top of that the studio has $250 million in revolving credit at J.P. Morgan chase, which matures in April. In Hollywood the perception is that April is the final deadline for the studio to get its new slate of films in order and start generating serious cash to pay off its debt. Comcast and Sony, plus Providence Equity Partners and Texas Pacific Group, took the company private back in 2005 for $5 billion. Now the debt-heavy way they structured the deal seems particularly unfortunate, as each year the DVD business yields lower and lower revenue.

Another source of revenue for the company has been massive franchises like James Bond, which it profited from while Sony Pictures Entertainment produced the film. The company was on track to start making these films in-house, with the idea that it would benefit from the full upside of the brand, but now it seems like it won't have the cash on hand to full produce and spend a hundred million dollars plus to distribute and market the film, which will be another blow to MGM, but could be great for Sony.

With all this talk of M&A activity, between Marvel's acquisition and now NBC Universal potentially in play, MGM is often bandied about as a potential acquisition target. Any number of studios - Warner Brothers in particular - could be interested in buying the studio, primarily for its massive film library, which continues to throw off cash. Sources in Hollywood tell me that they're waiting and watching for MGM to default so they can swoop up the assets at a fraction of the cost paid back in 2005 - $2.5 to $3 billion is the number I'm told other studios are looking for. MGM has a couple more months to sort out its business -- with big titles like "The Hobbit" and a sequel in 2011 and 2012; the studio is hoping it'll be able to continue to go it alone.

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