Sale Casts MGM in Supporting Role

With the nearly $5-billion acquisition of Metro-Goldwyn-Mayer Inc. by a Sony Corp.-led investment group now final, the lion’s roar is being reduced to a meow.

Already, the job cuts started Monday, when about 185 executives received pink slips. MGM’s staff of nearly 1,500 is expected to shrink in the coming months to around 200.

The historic studio that stood for 81 years, known for such classic films as “The Wizard of Oz” and the James Bond franchise, also will be pulling the plug on making and distributing self-initiated movies.

Plans call for the Century City-based company, famous for its roaring lion logo, to morph into a licensor of the 4,000 films and more than 10,000 television episodes in its library. It also will continue to oversee some TV production, cable channels and consumer product businesses.

How that transformation takes place at the new privately held company will be decided by no fewer than five investors divvying up 13 board seats.

Although Sony Corp.’s U.S. group is the flagship purchaser, it initially has limited clout with just a 20% stake. For now, the company through its Sony Pictures Entertainment will in effect serve under contract as a hired gun that will globally distribute MGM’s lucrative collection of movies and TV shows on DVD, including in its emerging Blue Ray high-definition format.

“It takes decades to build a library like this,” Sony Pictures Chairman Michael Lynton said. “And this one is a real gem.”

Amy Pascal, chairwoman of Sony’s Columbia Pictures unit, and Lynton also will hold the creative reins, allowing them to scour that film library for potential remakes that will be among the handful of movies MGM chooses to co-finance with Sony each year.

But the behind-the-scenes power at the new MGM rests with two investment companies, Providence Equity Partners and Texas Pacific Group, which combined control a majority of board seats. Although considered unlikely to be invoked, a clause in the deal even gives them the right to dump Sony as a distributor of MGM movies after one year if Sony fails to meet performance goals.

Kelvin Davis, a partner at Texas Pacific, which owns 21% of MGM, called the structure an “innovative partnership” that the parties are committed to making work.

“Clearly, there could be differing interests,” Davis said. “But you address those by having a common overall objective, appropriate legal agreements and a constructive spirit of partnership.”

Michael Angelakis, a managing partner at Providence, which contributed more than $400 million and has the largest ownership stake with 31.5%, said, “Based on the success and teamwork among the partners in assembling a very complicated deal, I am confident that our partnership will continue to work well together.”

MGM changed hands Friday, when the investors took control of the publicly held company from billionaire Kirk Kerkorian, paying cash and assumed debt. Despite its famous name, MGM is decades removed from its halcyon days, when it sat atop Hollywood’s studios, boasting “more stars than there are in the heavens,” including Judy Garland, Gene Kelly and Clark Gable.

It was Sony, led by new Chief Executive Howard Stringer and the company’s top financial executive in the U.S., Rob Wiesenthal, that drove the deal. For an investment of about $250 million, Sony gains for little risk access to the prized MGM library. In addition to the James Bond movies, it includes the Pink Panther series and such films as “Rain Man,” “Midnight Cowboy,” “Hotel Rwanda” and “Legally Blonde.”

Analysts expect Sony to eventually buy out the investment group, which also includes cable giant Comcast Corp. and DLJ Merchant Banking Partners. That could set the stage, they believe, for a possible initial public stock offering for all of Sony’s entertainment assets.

Just when and if that may happen is unclear. Stringer, who last month was named Sony’s first non-Japanese chief executive, is preoccupied with turning around the company’s struggling electronics business.

The MGM deal also includes no buyout provision or time frame for when Sony can cash out its partners. Sony executives declined to discuss the issue, but Sony and Comcast are said to be first in line should MGM’s collective owners put the company up for sale. Stringer declined to comment.

Equity firms such as Texas Pacific and Providence usually prefer to sell their investment stakes within a few years, rarely serving as long-term players.

“We tend to think in terms of five- to seven-year time frames, but every company is different,” Texas Pacific’s Davis said.

But Angelakis called Providence a “patient, long-term” owner that, in some cases, has held companies more than 10 years.

In the meantime, Sony’s Lynton and Pascal will be busy getting their arms around the huge volume of films and TV shows being added to their company’s own library of 3,500 films and 35,000 TV episodes.

To make things go smoother, Lynton said, Sony will hire about 300 additional executives to help integrate the operations, giving first crack to current MGM employees.

Pascal will pick movies that the new MGM may choose to co-finance or co-produce each year. Starting in January, she and Lynton are obligated to present six films a year to MGM directors. MGM can opt to join Sony as a financial partner on as many as four of the movies that Pascal and Lynton will make regardless.

“These are ‘go movies’ which Michael and I have picked and are already making as part of our slate,” Pascal said.

Pascal and Lynton also will be liaisons with Barbara Broccoli and Michael Wilson, who control and produce the lucrative Bond films.

As for MGM, it is being run by its former top financial officer, Dan Taylor, who was hired by the investment consortium to serve as president. He will sit on MGM’s board, which is expected to consider such issues as the fate of the company’s historic United Artists film label.

Taylor said MGM might even consider joining other studios as production partners. On Monday, ads in Hollywood trade papers proclaimed “The Lion Continues to Roar....”

But its famous name and logo will only occasionally appear on-screen, if nothing more than a reminder of when the lion once was king of Hollywood’s jungle.

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Who owns MGM

How the new ownership of MGM breaks down:

Providence Equity Partners 31.5% Texas Pacific Group 21% Sony Corp. of America 20% Comcast 20% DLJ Merchant Banking Partners 7.5%

Source: Times research