Spyglass toppers sign intent to take over MGM

Gary Barber, Roger Birnbaum would serve as co-CEOs

A new executive team is gathering on the sidelines at MGM, but the Lion still has to deal with a little matter of $4 billion in corporate debt before any of the recruits can jump into action.

Pushing the ball forward a bit, Spyglass co-toppers Gary Barber and Roger Birnbaum last week signed a non-binding letter of intent with MGM to become co-chairmen and CEOs of the Century City studio once the Lion completes a financial structuring. In a related move, Qualia Capital principal Ken Schapiro is being wooed as a possible new COO.

A former colleague of Birnbaum when both were execs at film indie Morgan Creek, Schapiro's joining MGM wouldn't necessarily come with an equity investment in the Lion by Qualia, however.

Terms of MGM's deal with Spyglass would see the Lion's crushing debt load converted to lender equity, with Spyglass getting a stake of less than 5% in the studio. But the long-suffering Lion lenders would see their ownership stakes diluted if any new equity stakes were to be carved out.

Meantime, MGM first must file for U.S. Bankruptcy Court approval of that and other details of a proposed "prepackaged" bankruptcy reorganization. It's unlikely that can be done before Sept. 15, the deadline for the studio to make more than $400 million in debt and interest payments.

So on Thursday, MGM is expected to seek a seventh forbearance agreement to delay having to make those payments. The studio would file its bankruptcy reorg plan in the next few weeks, and the payments then would become moot.

More than 100 lenders holding the Lion debt also must sign off on the reorg plan. That would happen at some point after the reorg is filed but before the court formally approves the plan, a source close to the process said.

The tentative agreement with Spyglass values MGM at $1.9 billion. That's about $400 million more than Warner Bros. offered as top bidder in a failed auction to sell MGM outright.

Private equity firms Anchorage, Highland, Davidson Kempner and Solis are the biggest debtholders after accumulating at least 35% of the Lion's publicly traded debt -- at notably higher prices than the debt has been trading of late. So with Warners sent packing and would-be MGM merger partners such as Lionsgate benched with little hope of getting back into the game, the biggest debtholders have little alternative but to throw in with Cerberus-owned Spyglass and hope Barber and Birnbaum can boost the studio's value.

Approval of a prepackaged bankruptcy would be needed from 51% of all lenders and a group representing two-thirds of the total amount owed. The later provision gives larger debtholders an effective veto.

Terms of Spyglass' arrangement with MGM stipulate payment of a $4.5 million "breakup fee" should the parties fail to close on the deal. It wasn't clear when the breakup clause becomes binding.

Current MGM owners including Providence Equity, TPG Capital, Sony, Comcast, DLJ Merchant and Quadrangle likely would see their equity positions in the studio wiped out in a restructuring.

MGM is being run by an office of the CEO comprised of turnaround specialist Stephen Cooper, CFO Bedi Singh and film topper Mary Parent. All would likely exit their posts if any of the existing proposals prevail.

Several major film projects have been stalled by the studio's financial woes, including the next James Bond picture and two films based on J.R.R. Tolkien's book "The Hobbit." Eventually, MGM would produce four to six movies per year under Barber and Birnbaum.

Some of the new MGM team's pics would be co-productions, and "Hobbit" rights are already shared with Warner Bros. Some industry sources put Paramount at the top of the list of studios who could distribute a handful of wholly owned MGM pics annually, while others suggest Barber and Birnbaum will shop around for the lowest distribution fee in choosing a distribution partner.

Noting Spyglass' propensity for co-financing pics with studio majors, a well-placed source said the new MGM team might base its distribution decision on whether a prospective partner allows MGM to buy into several attractive pics on its slate.

"They want to operate more like a bank than a producer," the source suggested.

To fund its film efforts, MGM is expected to turn to its existing lenders for a revolving credit facility of $200 million or so.