Why MGM is choosing Spyglass over others

Duo in final negotiations as debtholders are 'underwater'

With Spyglass Entertainment in final negotiations to become MGM's strategic partner and part-owner, there's the related question of why the Lion chose the indie producer above other prospective mates.

Here's a big reason: Major debtholders are pushing Spyglass because the deal represents a longer-term play and, atypically, the hedge funds holding much of the debt like that. They're now "underwater," having bought debt at high prices during the failed MGM auction, so the prospect of raising MGM's value over time is more appealing than it might be otherwise.

By contrast, a merger with publicly held Lionsgate, another finalist in the Lion's long-running search for a corporate combo, would force some debtholders to cash out and take their lumps immediately, under stipulations of their financial charters.

MGM's publicly traded debt, part of a nearly $4 billion debt load, recently has traded closer to 40 cents on the dollar than the 55 cents-60 cents range in which it was trading in late fall amid expectations that the MGM auction would fetch richer bids than eventually proved possible.

"A lot of these hedge-fund guys aren't educated in the business and were just buying up the debt based on a technical analysis of trading activity," a well-placed source said. "Well, they're getting an education now."

Negotiations still could blow up, but another benefit of choosing Spyglass is the relative simplicity of its major deal points; the company has few assets other than a library of a dozen or so movies. Assuming things go well in the homestretch, a review by the larger group of 100-plus MGM lenders could go quickly, and the MGM-Spyglass combination could be put to a vote by debtholders just after Labor Day and secure approval in time to file for voluntary reorganization in U.S. Bankruptcy Court by Sept. 15.

That's the latest deadline on more than $400 million in debt and interest payments owed by MGM.

Four hedge funds -- Anchorage, Highland, Davidson Kempner and Solis -- hold 35% of MGM's publicly traded debt. Approval of a prepackaged bankruptcy would be needed from 51% of all lenders and a group representing two-thirds of the amount owed.

A Spyglass deal with MGM would give Cerberus Capital-controlled Spyglass an estimated 4%-5% sliver of equity in the Lion, and debtholders would assume the vast majority of equity. Such a deal also would crown Spyglass co-toppers Gary Barber and Roger Birnbaum as Hollywood royalty, transforming the duo overnight from well-regarded film producers to top executives at a major studio.

A native South African, Barber ran James Robinson's Morgan Creek Prods. for nearly nine years from offices on the Warner Bros. lot.

Teaneck, N.J., native Birnbaum was president of Henry Winkler's Monument Pictures ("Young Sherlock Holmes") for several years before moving to Warners-based Guber-Peters Co. in 1986 as production president. He later headed Caravan Pictures ("Powder") before founding Spyglass with Barber in 1998.

Despite reputations as amiable producers, the Spyglass principals are known as hard bargainers. In 2002, the company was poised for a merger with now-defunct film producer Inter¬media, but the deal never closed.

Initially tapping European capital, Spyglass eventually was sold to New York-based Cerberus.

Early on, Spyglass was housed on the Burbank lot of Disney, its then-distribution partner. Now based in Westwood, the company partners with multiple studios to co-finance, co-produce and distribute its movies.

An MGM run by Barber and Birnbaum could mean distribution arrangements will continue film by film, though eventually a multipic pact could be struck with a single distributor.

The recently unspooled comedy "Dinner for Schmucks," a three-way Spyglass co-production with Paramount and DreamWorks, was distributed by Paramount.

If Barber and Birnbaum take over MGM, Spyglass is expected to continue as a film label, but rights to Spyglass-owned pics including "Seabiscuit" and "The Sixth Sense" likely would be folded into the massive MGM catalog.
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