Pathe Communications Co.'s $1.2-billion bid for MGM/UA Communications Corp. hit a roadblock Thursday as negotiations with its chief financial backer stalled.
Pathe was unable to come to terms with media giant Time Warner Inc., which is supposed to put up half of the purchase price, in time to meet its self-imposed deadline to close the deal Thursday.
Sources close to the discussions said the snag centers on Time Warner's decision to renegotiate parts of the agreement. One high-level source said Time Warner Chairman Steven J. Ross is particularly skeptical of Pathe's ability to meet its financial obligations.
In a related development, an executive familiar with the deal also revealed that the Securities and Exchange Commission recently ordered Pathe to disclose more details about the acquisition. "The SEC won't let it close unless some of this happens," he said.
While neither side would directly address those issues, Pathe's announcement implied that the impasse centers on Time Warner's concerns about Pathe's financial health and its ability to fund new film production. Pathe would take on a huge debt load under the deal, which would be financed almost entirely through its Luxembourg-based holding company, Comfinance SA, and Time Warner.
Mindful of those questions, Pathe announced that a "third party" has been retained to render a solvency opinion on the deal. The company also revealed that an independent appraiser will evaluate the fair market value of certain assets, such as the Pathe/Cannon film library. And Pathe said Time Warner had agreed to soften the terms of its loan.
In a prepared statement, Time Warner expressed confidence that an agreement will be reached, saying: "We have a signed deal with Pathe. The language in the Pathe release . . . accurately reflects the status of the deal between our two companies. Routine adjustments are being considered to accommodate the financing plans and Pathe's needs."
Pathe said it expects to complete the acquisition, for which MGM/UA has set a deadline of June 23, by next Friday. "This was to update where we stand on these conditions and to explain Comfinance's source of funding, which has always raised questions," the company said.
But those familiar with the deal said the discussions over the studio, which reclusive financier Kirk Kerkorian has been trying to sell for two years, may take several more weeks.
Individuals familiar with the pending buyout said Time Warner's concerns were triggered when the SEC asked for additional documention on the buyout and on a separate deal in which investor Ovidio Assonitis' plans to purchase Pathe's controlling stake in Cannon Pictures Inc. for about $15 million.
"They were asking, 'Where's this? Where's that?' They wanted things in a hurry, and Warner got up tight," one of the individuals said.
An executive familiar with the deal added: "Parretti has never liked lawyers. He tried to do this alone. . . . But Pathe has taken on more lawyers, and they're listening more to their in-house people. They realize this (supplying of documentation) has to be done."
In a telephone interview, Assonitis confirmed that his deal will be held up for "two or three weeks" because the SEC has asked for extensive new information on the transaction.
Assonitis said he didn't know precisely what information was requested. Pathe earlier said its sale of the Cannon unit was unrelated to the MGM/UA acquisition. But Wednesday's statement said Pathe's financing for the MGM/UA purchase would include $24 million from an existing credit line that would become available when the Cannon sale is completed.
Assonitis also confirmed reports that the Cannon unit missed its payroll in the last week. But he said the checks were delayed by only two hours because of a technical problem.
Securities analysts agreed that Time Warner is apparently taking a harder look at the deal, in which it would receive distribution rights to the United Artists film library and future Pathe and MGM/UA releases in return for loaning Pathe $650 million.
"Time Warner may be trying to structure the deal so it looks like it's not just a back-door way of obtaining their film library," said one analyst who asked to remain unidentified.
A source close to the talks said Pathe Co-President Giancarlo Parretti, who is appealing a "fraudulent bankruptcy" conviction in a Naples court, is another cause for concern, as is recent news that a French politician has called for an investigation of Parretti's dealings there. "The more Warner hears about the guy, the more skeptical they are about him," he said.
At Pathe's Beverly Hills headquarters, Parretti refused to comment. The Italian mogul has always been mysterious about the source of his funding for the deal, which began in March with a tender offer of $20 per share. Thursday's announcement said the money comes almost solely from unidentified bank loans.