Ryan Kavanaugh’s film company Relativity Media is aiming to take control of a major portion of MGM, which is in the process of trying to restructure a crushing $3.7 billion in debt, according to individuals involved in the transactions.
Relativity is not the only company to be circling the troubled MGM, with its rich library of historic movie titles as assets.
But the deal, confirmed by two individuals, would involve buying up a portion of the studio from the studio’s major investors, including Highland Capital, the Carlyle Group or Sequoia Group, and using control of that stake to force the company into bankruptcy.
Once MGM was in bankruptcy, Relativity could streamline the company’s $30 million per year operational costs, use its distribution networks for Relativity’s own films and operate without the current burden of creditors.
MGM has amassed a crushing load of debt, a portion of which comes due as early as 2010. Most of the $3.7 billion in debt, which incurs an estimated additional $250 million per year in interest fees, is due in 2012. The studio recently hired investment bank Moelis & Co. to help restructure the debt with a committee of creditors led by JP Morgan Chase & Co.
A spokeswoman for MGM denied that any kind of forced bankruptcy was an option to the company.
“We are looking at how to redesign the current debt structure — reducing loans, reexamine current terms,” said Susan Arons. “We are not looking at bankruptcy as an option. Mary (Parent) is making movies, the studio is staying independent. No one is hiding from realities, but bankruptcy isn’t in discussions.”
But MGM has not been directly involved in Relativity’s strategy, which has meant negotiating with investors, rather than current management.
Meanwhile, MGM’s management is engaged in attempting to restructure the debt, a process that would involve changing interest terms and forgiving some of it. That discussion, which will either conclude successfully or fail within the next few weeks, is currently ongoing among MGM’s creditors and owners.
That discussion is vastly complicated, referred to as a “Rubik’s cube,” by one senior person involved. MGM has some 150 debtors at approximately 90 different institutions. They must agree among themselves to the terms of any restructuring.
The complexity of those conversations may well lead some investors to opt out of MGM for some reduced offer by an outside buyer such as Relativity.
MGM has been struggling since its reconstitution in 2006 to find a hit. Chairman Harry Sloan brought in Universal production whiz Mary Parent to chair the motion picture department. Parent has been greenlighting movies like the upcoming “Fame” and “Cabin in the Woods” but is still hamstrung by a lack of capital at the studio.
The studio has other movies in the works including two “Hobbit,” movies, a spy thriller adapted from Robert Ludlum’s suspense novel "The Matarese Circle," starring Denzel Washington, and a new installment of "Robocop."
But, all of this will not be enough if the debt is not dealt with, and if some of the movies are not hits.
“The trick is the studio has to make money,” said one MGM executive, who declined to be identified. “Without making movies, the library value isn’t sustained. You can’t refresh it. So you’d have to come in, buy company, figure out how to get a bigger production line.”
In recent years, Kavanaugh – with access to a vast sum of Wall Street capital — has become one of Hollywood’s leading players, and – as one wag put it – a “deal junkie.” The company, which produces and finances films, bought the genre house Rogue Pictures and its library of 30 films from Universal at the end of last year.
One individual associated with Relativity’s strategy of forcing bankruptcy said that other companies circling MGM will fail at any attempt to buy it. “MGM is not buyable,” said the individual. “The only way is to restructure it through bankruptcy.”