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A Twist in Sony's Quest for MG

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  • A Twist in Sony's Quest for MG

    JULY 2, 2004

    NEWS ANALYSIS
    By Steve Rosenbush

    A Twist in Sony's Quest for MGM While it lines up financing partners
    for the bid, Time Warner has jumped in with an offer that could prove
    far more attractive For a while, it appeared that Sony ('SNE') was
    close to adding the vaunted MGM ('MGM') movie studio to its impressive
    stable of film properties, which already includes Columbia and TriStar
    Pictures. Sony's U.S. unit, run by former CBS news chief Howard
    Stringer, has been deep in negotiations with MGM for about two months,
    people close to the talks say. And Sony had lined up several investors
    to back up its $5 billion bid (see BW, 7/12/04, _"Imagine Sony on
    Steroids"_
    (http://www.businessweek.com:/magazine/content/04_28/b3891116.htm) ).

    Then came Time Warner ('TWX'). New disclosures that the media and
    entertainment giant submitted a rival bid of about $4.7 billion a week
    or so ago (first reported on June 29 by the Wall Street Journal
    Online) have suddenly thrown prospects for a MGM-Sony deal into doubt,
    people close to the negotiations say.

    STOCK DEAL'S APPEAL. It's too early to say for sure who'll win the
    contest. Negotiations are expected to continue for several more
    weeks, and reports are circulating of a possible third suitor, such as
    General Electric's ('GE') NBC unit. But the Time Warner bid could be
    formidable. Why? The media empire is returning to fighting form after
    its painful merger with Internet service AOL. And it has some powerful
    advantages as it steps into the ring with Sony.

    Time Warner's biggest strength may be its ability to pay for most of
    the deal in stock. The company took a beating after it merged with
    AOL. But investor Kirk Kerkorian, who owns 74% of MGM, believes that
    Time Warner Chief Executive Richard Parsons is close to pulling off a
    turnaround, one person close to MGM says (see BW Online, 7/1/04,
    _"America Online Gets Clicking"_
    http://www.businessweek.com:/technology/content/jul2004/tc2004071_6275_tc119.htm).

    That's why he's willing to sell his stake in MGM to Time Warner for
    $11.50 a share -- as long as Time Warner pays that part of the price
    in stock. Kerkorian would profit from any appreciation in the stock,
    while avoiding big tax liabilities associated with an all-cash
    transaction. Time Warner would, however, purchase the remaining 26% of
    MGM, which is publicly held, for $13 a share in cash.

    BIG OPENING. Sony, which is having a tough time in the
    consumer-electronics business, couldn't afford the deal on its own. It
    has arranged backing from investment bank Credit Suisse First Boston
    and private-equity players Providence Equity Partners and Texas
    Pacific Group. Not only has it found investors willing to share the
    expense, but it would structure the deal so MGM's $1.9 billion in debt
    wouldn't appear on Sony's balance sheet. Together, they're offering
    $13 a share in cash for MGM.

    Help from Sony's partners complicates the deal, though. As a long-term
    strategic investor, Sony's interests aren't fully aligned with those
    of its partners, who want an exit plan in place before they close the
    deal. Even as Sony negotiates with MGM, it's conducting talks on a
    parallel track with its own team. Providence and Texas Pacific want to
    make sure that Sony will buy them out in a few years -- and at a good
    price. But putting a value on the combined film units is difficult and
    subject to disagreement, people familiar with the matter say. That's
    the main reason why Sony's bid for MGM has been dragging on for weeks.

    That internal wrangling has given Time Warner a huge opening. And no
    question, Parsons & Co. would love to have MGM, which includes the
    world's largest library of color films. If Time Warner's 4,500 films
    and MGM's 4,500 were combined, they would constitute 45% of the
    Hollywood movie-library market. That's even bigger than a Sony-MGM
    combination, which would control 40%.

    CURRENCY EDGE. The MGM collection also includes some of the most
    popular titles of all time, including James Bond. That could almost
    guarantee a steady stream of cash for years to come. MGM has also
    mastered the art of producing popular movies, like Barbershop and
    DeLovely, on relatively low budgets. They would supplement big-bet
    blockbusters like Time Warner's Harry Potter series.

    Even the currency market is working in Time Warner's favor. While the
    value of Time Warner shares are on the rise, the cheap dollar makes
    Sony's hard currency somewhat less enticing.

    It's way too early to count Sony out. Differences with its partners,
    however complex, can be overcome. And people familiar with the
    negotiations say the parties have been making progress after weeks of
    talks. They better resolve those differences quickly, though. The
    Sony-MGM deal no longer seems like such a sure thing.

    Business Week On-line
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