It's a matter of life and debt for MGM

Details of restructuring proposal being formulated

MGM's owners appear to know they are going to be left with pennies on the dollar of their $4.9 billion investment.

Details of a restructuring proposal are being formulated by MGM and its advisers. But a series of conference calls between Lion execs and studio creditors have made it plain that the MGM owners' hold on the studio is crumbling.

A recent audit confirmed the Lion is in no imminent danger of insolvency. But cash flow is so tight that MGM execs recently met with liquidity consultants to discuss strategies for navigating relations with the studio's many vendors.

Creditor-side sources say the Lion's consortium of owners -- including investment firms Providence and TPG as well as Comcast and Sony -- will do well to come out of the restructuring with even a 10% stake in the studio.

A restructuring would make roughly 150 MGM creditors majority owners of the studio by converting about $2.5 billion in Lion debt into equity.

MGM chief exec Steve Cooper -- a turnaround specialist brought in by current owners -- recently acknowledged in a conference call with the creditors group, "All right, guys, the debt owns the equity."

That could be strategic posturing, but for now, MGM creditors are giving the studio's new CEO high marks for his forthright style.

"He's brought a refreshing level of candor to the process," one call participant said.

Since Cooper was brought in a month ago to replace Harry Sloan, who continues as MGM's non-executive chairman, it's been apparent the studio's owners were aware of the precariousness of the situation. But Cooper's acknowledgment that their position has eroded dramatically has helped talks with creditors gain fast traction.

Execs at MGM declined comment. A source close to the studio said conference calls with creditors have been "going well" and are "productive."

As for moviemaking during this delicate phase, it is expected to continue unabated through the restructuring period. Pics are being financed via partnerships with other studios and by tapping into a Merrill Lynch-created production fund at MGM's United Artists division.

Cooper is taking on his first Hollywood challenge following turnaround efforts on behalf of Krispy Kreme Doughnuts and a high-profile stint sorting out the Enron bankruptcy. Once an MGM restructuring is completed -- a process expected to take a few months -- the lenders-turned-owners likely will put their equity stake up for auction.

Prospective bidders include Lionsgate, Time Warner and Fox, all of which could fashion stock-and-cash offers for a restructured MGM. The studio's debt will likely be pared to less than $1.5 billion before the auction.

Creditors expect Cooper to deliver a preliminary plan for MGM's restructuring by late October.

Meanwhile, other parties could surface with plans to help MGM recapitalize.

Qualia Capital's Amir Malin, a former CEO at Artisan, has been talking to several parties in a quest to be named to lead the MGM restructuring. The Qualia offer comes with a pledge to invest a substantial sum of its own money in the studio.

MGM's current owners acquired the Lion in April 2005. This year, they hired investment firm Moelis & Co. to conduct what so far has been an unsuccessful search for new capital to bolster the studio's balance sheet.

Lion creditors are led by JPMorgan Securities, which funded MGM's $250 million credit facility that's set to expire in April. The creditors also have retained the Houlihan Lokey investment advisory.
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