MGM studios on verge of bankruptcy

Hollywood film-maker faces 'brinkmanship' talks with potential buyers as it sinks under $3.7bn debt

The future of one of the world's most famous film studios is hanging in the balance this weekend, as creditors of Metro Goldwyn Mayer debate whether to force the company into bankruptcy.

Famed for its roaring lion logo, the historic studios are home to the James Bond and Pink Panther franchises, and to a back catalogue of classics from Gone With The Wind and Ben-Hur to The Wizard of Oz and 2001: A Space Odyssey.

But a highly leveraged $5bn takeover by a private equity consortium in 2004 crippled the company, and the investors who financed that deal are faced with a choice between selling for less than they are owed, or trying to arrange a restructuring in bankruptcy that could give them formal ownership, and a shot at restoring the studio to former glory.

Creditors set a 31 March deadline for an agreement, but MGM asked last week for that be extended while it tries to gee up improved offers from two remaining bidders: Time Warner, owner of Warner Brothers studios, and Access Industries, a conglomerate controlled by Len Blavatnik, the New York and London-based businessman who is ranked as one of the 100 richest people in the world.

Lions Gate Entertainment, the film and TV production group, dropped out of the auction last week. Time Warner is said to lead the bidding with an offer of $1.5bn, far below the $2bn that creditors had expected.

MGM has struggled under a $3.7bn debt, having overestimated the likely cashflows from a library of more than 4,000 movies stretching back to its foundation in 1924. A slump in DVD sales immediately wrecked its business plan, and the consortium of equity investors – which included media groups Sony and Comcast, as well as four private equity firms – has already written off its investment.

That leaves the fate of the company in the hands of bondholders, who have been told they will be presented with a proposal for a debt-for-equity swap, possibly as part of a pre-packaged bankruptcy deal which would have to be rubber-stamped by a judge. Talks are continuing this weekend in an atmosphere of brinkmanship, and MGM's advisers hope they can tempt Time Warner or Mr Blavatnik to improve their offers.

Media sector deals such as Disney's $4bn purchase of Marvel prove that financing is once again available for merger and acquisition activity. Michael Corty, an analyst at Morningstar, said Time Warner is likely to be a disciplined bidder for MGM – unlike the consortium that bought it from billionaire Kirk Kerkorian and his business partners in 2004.

"The $5bn buyout price was viewed as the sign of a Hollywood bubble at the time and the value has declined," Mr Corty said. "We view Time Warner's interest as an attempt to buy an asset on the cheap and believe it is willing to walk away if the final price is too high."