After nine months of tumult over the future of Metro-Goldwyn-Mayer, the storied movie studio's fate now rests in the hands of debt holders with little experience in the entertainment business.
Hedge funds that control large chunks of MGM's $3.7-billion debt, including Anchorage Advisors and Highland Capital Management, are ignoring a 2-month-old acquisition offer from Time Warner Inc. and a restructuring plan backed by Chief Executive Stephen Cooper, a turnaround expert brought in last year, to reboot the studio with $1 billion in new capital.
The hedge funds, which would own the studio by swapping debt for equity, have balked at raising that much money and are seeking to keep MGM afloat at significantly lower cost, according to people close to the matter. The debt holders are now at odds with MGM management over how ambitious a plan is needed to salvage the studio.
The internal divide and lingering uncertainty demonstrate how tortured MGM's reorganization process has been and how the balance of power has shifted from management to lenders.
"Now that MGM's debt holders are in control of the company, they have a steep learning curve to get up to speed on a complex business," said Clark Hallren, managing partner of entertainment banking advisory firm Clear Scope Partners, who is not involved in the process.
In recent weeks they have also met with veteran Hollywood executives, including former News Corp. President Peter Chernin, onetime Warner Bros. co-Chairman Terry Semel, and Joe Roth, who previously ran Walt Disney Studios and 20th Century Fox, to seek their advice and gauge their interest in running the studio.
The debt holders are considering a strategic partnership with such companies as Summit Entertainment, the independent studio behind the "Twilight" movies, and production and financing company Spyglass Entertainment. In exchange for equity in a restructured MGM, the partner would oversee a small production slate and manage the 86-year-old studio's 4,000-title library, which controls the James Bond franchise.
But a cohesive plan has yet to materialize and must be accompanied by the none-too-simple task of raising money for operations and new movies.
Cooper, who previously was tapped to oversee troubled companies such as Enron and Krispy Kreme, was brought in last August by MGM's owners to restructure the company's crippling debt. The studio assumed the liability when it was acquired in 2005 by an investment group that included private equity funds Providence Equity Partners and Texas Pacific Group.
Cooper and his team, including two executives from his firm Zolfo Cooper who work full time in MGM's Century City headquarters, determined the best course was to recapitalize the company and maintain its independence, a person familiar with the process said.
However, MGM's debt holders didn't want to inject more capital into the beleaguered studio. Instead, last fall they pushed Cooper to sell the company.
They couldn't have picked a worse time. Film libraries have eroded in value recently as consumers have cut back on DVD purchases. A drawn-out sale process that lasted into the spring led to several initial bidders, including Lions Gate Entertainment and industrialist Len Blavatnik, dropping out. By May, only Time Warner's $1.5-billion offer remained.
MGM's creditors had hoped for much higher bids. Over the last six months a group of hedge funds including Anchorage, Highland and Davidson Kempner Capital Management bought a substantial amount of the studio's debt at more than 50 cents, and in some cases more than 60 cents, on the dollar. That meant they would have to sell the studio for well over $2 billion just to break even.
Though Time Warner's bid has not been officially rejected, people at the media giant's Warner Bros. studio have been frustrated by the protracted process, in part because it and MGM co-own the rights to movies based on J.R.R. Tolkien's "The Hobbit," which are currently in development.
MGM's lenders are still weighing options as they grant one waiver after another on the studio's interest payments. Cooper's plan calls for MGM to continue producing and distributing six to eight films a year, while less ambitious and costly proposals include making fewer movies and having partners co-finance and possibly distribute them.
MGM motion picture group Chairwoman Mary Parent, who has been running day-to-day operations for the last two years, has been left to hold together the company and its nearly 500 employees with no visibility on its future. Her tasks include dealing with filmmakers whose projects are in limbo.
"I'm a very bad Sherlock Holmes trying to figure out what's happening over there," said producer Bradley Thomas, who along with his director partners Peter and Bobby Farrelly has been attempting to make a film at MGM based on the Three Stooges. "I feel impotent. We can't do anything until it's resolved."
In April, the longtime producers of James Bond movies announced that they were indefinitely postponing a planned 23rd installment because of the "continuing uncertainty surrounding the future of MGM."
The only picture left on MGM's release slate this year is a remake of the Reagan-era classic "Red Dawn." Scheduled for release in November, the film doesn't yet have a marketing plan or even, as is standard six months out, a first trailer.
"We all would like to have closure on what will become of the studio," said "Red Dawn" producer Beau Flynn.