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MGM to Pay $825 Million for Stake in Cablevision Channels


Metro-Goldwyn-Mayer Inc. has agreed to pay $825 million in cash for a 20% stake in four national cable channels owned by Cablevision Systems Corp. in one of the richest deals ever paid for such properties.

The agreement was struck before dawn on Thursday, after Cablevision, the largest cable operator in New York, failed in an auction to get its asking price of more than $4 billion for its cable programming holding company, Rainbow Media Group.

Cablevision's four channels, American Movie Classics, Bravo, the Independent Film Channel and WE: Women's Entertainment, have struggled to compete against networks such as Turner Classic Movies and Lifetime Television with direct access to movie libraries and deeper pockets for program acquisitions.

MGM said the Rainbow deal is just the first step in the company's broad expansion plans.

"For MGM, vertical integration into movie-based cable distribution has always been central to our growth strategy," said Alex Yemenidjian, MGM chairman and chief executive. "This transaction is the first of many to expect. We want more cable channels, a broadcast network, a television station group. We're really at the beginning of our growth cycle."

Cablevision founder Charles Dolan rejected bids that came in under $4 billion from USA Networks, Viacom and NBC because he was interested in getting more than just cash. Cablevision sources say the MGM deal was desirable because of the strategic value of the partnership.

One of the bidders said $4 billion was a "ridiculous price" that was not justified by the financial performance of the networks. Analysts estimated that MGM is paying nearly 30 times the annual cash flow generated by the channels--a significant premium over other sales for such properties.

MGM has long sought cable distribution to extract more value from its storied name and a film and television library that is one of the world's largest--and Cablevision needed the competitive content for its niche channels.

The deal is the culmination of on-and-off negotiations between the two companies over the last year and a half.

The deal values the four networks at $4.1 billion--making it richer than the record price that Viacom recently paid for BET Holdings. In the recent auction, USA Networks bid close to $4 billion, while Viacom and NBC came in at about $3.5 billion and $3.8 billion, respectively, according to industry sources.

NBC already owns a 26% stake in Rainbow.

Though Thursday's agreement covered only the equity investment, the partners said they probably would strike a content deal under which MGM's library as well as its current television and movie output, which includes the vaunted James Bond franchise, would eventually air on the four networks.

"The possibilities for future cooperation are wide," said Josh Sapan, chief executive of Rainbow, who added that the cash from the MGM transaction would be used to retire debt and invest in programming. "Having more channels is on our horizon."

MGM does not have an option to increase its stake in the four channels, although Yemenidjian said he hopes to negotiate such a provision. He said MGM could afford to pay a higher price than other suitors because of its library.

Though the most valuable titles in the MGM library are controlled by AOL Time Warner, many of them will begin coming back to MGM in 2003.

Cablevision sources said the deal was hammered out over the weekend by Dolan and MGM's controlling shareholder, Kirk Kerkorian. The two entrepreneurs had come close to striking a 50-50 partnership last August, but the deal broke down over control issues.

In announcing the deal Thursday, Cablevision said it still plans to issue a tracking stock for the Rainbow subsidiary that holds the four networks along with several other assets, including regional sports networks and the online music site

A shareholder vote on the tracking stock proposal, which had been set for today, was postponed for the fourth time, until Feb. 16, to give shareholders time to evaluate the MGM deal.

Cablevision, a cable provider based on Long Island, had considered selling rainbow entirely to concentrate on its strategy regionally, where it owns cable systems, Radio City Music Hall, Madison Square Garden and two New York sports teams, the NBA's Knicks and the NHL's Rangers. Those properties are not affected by the MGM transaction or the tracking stock.

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