MGM Agrees to Reduced Turner Offer : Crisis Talks End With Second Big Revision of Deal Since August

Atlanta broadcaster Ted Turner on Thursday renegotiated a lower price to acquire MGM/UA Entertainment Co. after days of crisis talks here. A number of analysts put the value of the new cash-and-stock price at about $200 million less than the original $1.45-billion price tag.

At one point, there was a threat that the deal would fall through, according to one source close to the negotiations. However, sources said both sides seemed to want to revive it, and the price was revised sharply for the second time since the original Aug. 2 agreement.

Personally taking part in the final round of negotiations were financier Kirk Kerkorian, who controls MGM/UA with a 50.1% stock holding, and Turner, who owns 81% of Turner Broadcasting System, sources said.

Some analysts said the latest price to be paid by Turner Broadcasting, which owns Atlanta “superstation” WTBS and Cable News Network, for the Culver City-based movie studio is more realistic, increasing chances that the necessary financing can be arranged.

Favorable Reaction

Wall Street reacted favorably to Thursday’s announcement by sending MGM/UA’s stock up $2.625 to close at $22.625 in New York Stock Exchange composite trading. Also, Turner’s stock rose 62.5 cents to close at $14.75 on the American Stock Exchange.

“I think it (the announcement) indicates that Turner wants to do a deal and the sellers want to sell,” said media analyst Ed Atorino of Smith Barney, Harris Upham in New York. “It looks like they hammered out a very creative way to do it.”

Announcement of the new terms showed that about $250 million was chopped off the cash portion of the price. Turner Broadcasting is now to pay $20 instead of $25 for each of the nearly 50 million shares of MGM/UA.

However, a presumably improved type of preferred stock was substituted as the rest of the price. Turner Broadcasting will give for each MGM/UA share one share of Turner preferred stock with dividends at 14% payable the second year.

However, there is no guarantee they will be in cash.

“Dividends would be payable in cash to the extent permitted by (the Turner company’s) debt instruments or in shares of (Turner) common stock,” the announcement said.

The common stock would be valued at market level except in the second and third years after issuance, when it would be valued for dividend purposes at not less than $15 a share. To the extent that the market value is less than $15 in those two years, the difference would be paid in additional preferred stock valued at market, the announcement said.

Discount Value of Stock

Dividends on the preferred shares offered previously would have been deferred until the sixth year, but they would have been paid strictly in cash.

Although the parties said the new preferred will have a “stated value” of $10.33 a share, experts say market forces will discount that value once the stock begins trading. Estimates of the early market price for the issue were as low as $5, though some guessed $6 to $7.

In early October, the price of the Turner offer had been renegotiated to $25 cash and a share of preferred stock, instead of the $29 in cash originally agreed upon two months earlier.

Investment banker Drexel Burnham Lambert, which assisted in the negotiations at its Beverly Hills offices after balking a week ago at MGM/UA’s financial condition, said Thursday that it “remains highly confident” that it can arrange the financing.

Drexel Burnham first made that statement last Aug. 15, when the agreed price was $29 a share--all cash. Drexel Burnham proposed to raise the cash by selling high-risk, high-yield “junk bonds.”

However, Wall Street reacted adversely to prospects for a successful conclusion of the deal.

MGM/UA’s stock price only rose to a high of $27 and then receded several points. Terms of the sale were revised Oct. 2 to $25 cash and one share of preferred, but the stock failed to improve markedly.

Drexel Burnham now will have an added month to sell the securities.

The final deadline has been reset to March 31 from Feb. 28, but the deal might be closed by mid-March, a source close to the situation said. A new record date of Jan. 26 was set for MGM/UA’s special stockholders’ meeting to vote on the deal.

Outcome Is Assured

The date of the meeting, whose outcome is assured because of Kerkorian’s dominant holding, can be set as soon as 20 days after regulatory approval of management’s final proxy material, which now is expected to be filed early next week with the Securities and Exchange Commission.

Observers were interested to see that the announcement showed no change in a major corollary deal, in which Kerkorian is to buy United Artists from MGM/UA. The financier is to pay $9 a share for 53 million shares of a new UA, or about $480 million, for the United Artists subsidiary.

Although that is to occur at the time of the closing of Turner’s purchase of MGM/UA, Kerkorian has already set up--with great fanfare--a new UA headquarters and installed the executives who will operate it as a separate Hollywood film production company.

Also, no change was reported in the arrangements for Turner to assume virtually all of MGM/UA’s long-term debt of some $600 million, while Kerkorian’s new UA will be essentially debt-free.

One securities analyst, Gordon Crawford, a senior vice president at Capital Guardian Research in Los Angeles, called the new price for MGM/UA “less ridiculous” than the previous one.

Regarding the preferred stock, Crawford said: “It is not easy to price these pieces of junk paper that they create.” He estimated that the initial value would be close to $5 a share. That would make the overall value of the deal at $25 a share, or about $1.25 billion.

He conceded that “certainly the odds have improved” for the deal to be completed.

Deal ‘Going Through’

Harold Vogel of Merrill Lynch in New York said: “I think the deal is going through. Obviously it is a reduction (in price). It makes it easier for Turner to pay . . . but it doesn’t hurt Kerkorian significantly.”

And Steven Rosenberg, an analyst here for Paul Kagan & Associates of Carmel, said: “Whether by design or by happenstance, Ted (Turner) is negotiating a deal on a price that is more in line with what people thought MGM is worth.”

A source close to the negotiations said Thursday that it is still anticipated that Turner Broadcasting will sell some assets to help digest the MGM purchase.

Talks are still on hold, the source said, and the primary emphasis will be on the effort to arrange the MGM financing without such sales. Negotiations to sell part of Turner’s Cable News Network or some of the MGM assets collapsed several weeks ago.

THE CHANGING TURNER-MGM/UA DEAL

Aug. 7, 1985--Both parties announce a definitive agreement for Turner Broadcasting to acquire MGM/UA Entertainment Co. for $29 a share cash, or about $1.45 billion. As part of the deal MGM/UA stockholder Kirk Kerkorian will buy UA for about $480 million.

Aug. 15, 1985--Drexel Burnham Lambert, investment banker to Turner, states officially that it is “highly confident” it can arrange the financing at the agreed price.

Oct. 2, 1985--MGM/UA accepts revised terms reducing the cash part of the price by $200 million, to $25 per MGM/UA share. In addition, Turner Broadcasting will issue one share of a new issue of convertible preferred stock for each MGM/UA share that would not pay any dividends for the first five years. The parties value the preferred at $4 a share, keeping the stated purchase price the same.

Oct. 7, 1985--Drexel Burnham files a registration statement with the SEC saying it will raise the cash part of the price by selling a combination of zero-coupon notes, senior notes and subordinated debentures, all commonly known as high-risk, high-yield junk bonds.

Dec. 19, 1986--Turner files a revised registration disclosing that it will seek to raise $125 million more from the sale of securities. Excess funds would be used for operations.

Jan. 16, 1986--After renegotiations brought on by their stated difficulty in completing the deal under the existing agreement, the parties announce the price has been revised to $20 per share cash (down another $250 million, or a total of $450 million below the original agreement). In addition, Turner is to issue one share of preferred stock for each MGM/UA share. The preferred would pay dividends beginning in the second year at 14% interest. Dividends would be payable in cash “to the extent permitted by Turner’s debt instruments,” or else in shares of Turner Broadcasting common stock. The parties do not change their estimate of the total value of the deal, but some outside experts estimate the value as low as $1.25 billion, down about $200 million.