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Sony Has a Yen for MGM

22 Apr, 2004 By: Kathleen A. Marla R.

Takeover rumors were the talk of the town Wednesday in Hollywood as sourcesreported that MGM is in advanced talks to be bought by Sony Corp. and two privateequity firms: Providence Equity Partners and Texas Pacific Group.

Both entertainment companies and both investment firms declined comment. Butsources familiar with the matter said Sony recently approached MGM to initiatediscussions, and a deal valued at $5 billion or more could be reached within a matter ofweeks.

On the other hand, an agreement could also fizzle. MGM has long been rumored to befor sale, though past combination proposals with suitors like Time Warner have failedto materialize (The Hollywood Reporter, 12/19). The confirmation of Sony-MGM acquisition talks spurredspeculation that other suitors could jump into the fray, especially as Wall Streetobservers characterized the $5 billion sale price as low, given the size of MGM's filmlibrary.

MGM chairman and CEO Alex Yemenidjian has frequently commented that MGM would be more effective as part of a larger company but has maintained that MGM could achieve that as easily by being on the buying end as the selling end of a business equation. MGM was one of a number of companies in the bidding for Vivendi Universal Entertainment last year before losing out to NBC and parent company General Electric.

Analysts applauded the idea of a combination, saying that a Sony-MGM marriage would produce cost efficiencies and create an unrivaled film library powerhouse.

"The attractions for Sony would be the library, the cost savings and the three bigfranchises -- Bond, 'The Pink Panther' and 'Rocky,' " said David Miller, senior vp mediaand entertainment research at Sanders Morris Harris.

Miller said he would consider a purchase price of $5 billion to be low. MGM has in thepast been rumored to have asked for as much as $7 billion or more from possiblesuitors.

While cautioning that "we've heard this rumor before" about MGM facing an imminentsale, Miller said that an offer in the $5 billion range "could be the first bid in a long andprotracted negotiation."

Robert Routh, senior media, cable and entertainment analyst at Natexis Bleichroeder,said he wouldn't be surprised to see other bidders "come out of the woodwork" nowthat Sony and MGM are in advanced talks.

"Time Warner, Disney ... It's like a garage sale: Someone picks up something otherpeople thought was unsalable, and suddenly everyone else wants it," Routh said. Routhseconded Miller's opinion that $5 billion sounded low for MGM, particularly given thatother companies could be expected to jump into the bidding.

Routh said another reason MGM would appeal to Sony is that it could provide "a vehiclein which it could take Sony Pictures Entertainment public." There has been talk for sometime of Sony spinning off its entertainment division as a separate unit. A Sonyspokeswoman said Wednesday the company "can't comment on rumors."

The only comment MGM made was to reaffirm management's recently revealed plan torecommend a one-time dividend to shareholders of $8 per share, which would providean especially large cash windfall for majority owner Kirk Kerkorian. Some observersbelieve Kerkorian, who has bought and sold MGM several times in the past, could beopen to a deal at a lower price than in the past once he collects the windfall.

"MGM expects its board of directors to vote on the dividend recommendation shortlyafter the completion of the refinancing of the credit facility, which is expected to closenext week," an MGM spokesman said in a statement.

The two private equity firms involved in the talks are no strangers to media deals.Providence was a partner with Edgar Bronfman Jr. and several other entities in thepurchase of Time Warner's music operations in November. Texas Pacific just took aminority stake along with Spectrum Equity Investors in satellite operator Eutelsat inMarch.

MGM shares Wednesday closed up 11.9% at 19.75 after hitting a two-year high of20.25 earlier in the day.

Marla Matzer Rose reported from Los Angeles; Kathleen Anderson reported from NewYork. Reuters contributed to this report.

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