MGM lenders getting anxious

Bankruptcy reorganization likely if bidder not found

The Lion's lenders are growing restless.

With a dearth of second-round activity in MGM's search for a buyer, there is increasing likelihood that the studio will undergo a bankruptcy reorganization.

Six suitors are conducting additional due diligence, which includes management presentations of detailed financial information about the Century City studio. But a deadline on second-round bids hasn't been set following receipt last month of a dozen nonbinding offers in an initial round of bidding best described as underwhelming.

MGM consultant Moelis & Co. invited just half of those making first-round offers to participate in the next phase of the process, including Time Warner, Lionsgate and Access Industries, with Qualia Capital still circling but not actively involved.

Time Warner is considered a favorite to win the competition with a top bid. But it's far from certain that the Warner Bros. parent will be motivated to offer top money for the Lion, whose burdensome $3.7 billion debt load prompted the search for a buyer.

With MGM debt recently trading at 60 cents on the dollar, that would mean the studio would have to sell for more than $2.2 billion to fully pay off lenders. But almost nobody sees the Lion fetching that sort of money.

So how low would its lenders go in accepting a sale to a new group of owners? Nobody can say with certainty.

"I don't think there is a clear consensus on what the lenders will accept," a lenders-side source said Thursday.

Despite that, some suggest the Lion could be snared for about $1.7 billion, largely because of an absence of good options for MGM's lenders or owners.

If a top bid for MGM fails to find enough support among its more than 140 lenders, the only other option would be a debt restructuring. That probably would include a prepackaged bankruptcy reorganization by which lenders would morph into owners and present owners would see their stakes heavily diluted.

MGM owners include Providence Equity, TPG Capital, Sony, Comcast, DLJ Merchant and Quadrangle.

JPMorgan Chase is leading a lenders steering committee and being advised by Houlihan Lokey.

Despite its presumed front-runner status, Time Warner is notably gun-shy on big acquisitions these days. After finally ridding themselves of AOL, Time Warner brass is determined to avoid shareholder ire over a pricey purchase.

MGM bids amount to chump change compared with the multibillion-dollar Time Warner-

AOL transaction. But that sour experience could keep the New York conglomerate from acting aggressively.

Lionsgate on Wednesday filed a $750 million shelf registration, alerting investors that the minimajor might raise such an amount through the sale of stock or debt. The move could mean that the

Vancouver-based company remains in the hunt for the Lion -- or, more affordably, for Miramax, which Disney has tagged for sale at $700 million -- despite warnings by stakeholder Carl Icahn.

Access Industries is a diversified international conglomerate run by Len Blavatnik from corporate offices in New York, London and Moscow. Its global portfolio includes media and technology businesses.

Qualia is run by Amir Malin, former chief of Artisan Entertainment, which merged with Lionsgate in 2003. Although it remains on the periphery of the process, Qualia would be involved only in a restructuring and thus is not among the six invited to make second-round offers.

MGM chief Stephen Cooper argued for a simple restructuring rather than a sale. But the lenders insisted that a search for a buyer be conducted.

Meanwhile, though the identities of three of the second-round bidders are unknown, it's unlikely they are Hollywood studios.

Fox participated in the first round but wasn't invited to the second. Reliance Big Entertainment, a principal in recently reconstituted DreamWorks, opted out after participating in the first round.

With more than $400 million in principal and interest coming due within two months, one party following the second round observed that the process has gone "amazingly quiet" of late.

MGM has until March 31 to pay $200 million or so in interest due debtholders, who have agreed to three postponements but would be unlikely to approve a fourth unless a winning bidder had been identified. The Lion is unlikely to make the interest payment regardless, as a $250 million payment on debt principal comes due eight days later when the studio's revolving credit facility expires April 8.