After pulling out of the auction for Metro-Goldwyn-Mayer Inc. in September, Time Warner Inc. apparently had an immediate change of heart and tried desperately to get back into the fray, according to documents MGM filed with the Securities and Exchange Commission.
Time Warner was initially thought to be the front-runner for MGM, but surprised Wall Street when it issued a terse statement on Sept. 13 that it was withdrawing from the auction.
Just hours later, MGM announced it had agreed in principal to be acquired by a group led by Sony Corp. for about $4.9 billion, or $12 per share.
SCRAMBLED TO RETURN
Most observers believed Time Warner dropped out of the race for the reason it stated in its Sept. 13 press release: It and MGM could not agree on “a price that would have represented a prudent use of our growing financial capacity.”
But according to the filing, about 10 days after making that announcement, Time Warner scrambled to get back into the auction.
According to the SEC documents, Time Warner contacted MGM chairman Alex Yemenidjian on Sept. 23 — just 90 minutes before the scheduled board meeting where MGM directors were set to approve the Sony offer — and said it had a partner and was ready to top Sony’s bid.
Although Time Warner did not reveal the identity of that partner, several published reports speculated that it was Japanese electronics giant Toshiba Corp.
However, Time Warner executives said they would need an additional two to three days to finalize negotiations with their group and to receive approval from their own board of directors.
But Yemenidjian said he would delay the vote only if Time Warner assured him that the offer was “meaningfully higher” than $12 per share, and would agree to the $150 million nonrefundable breakup fee.
Time Warner balked at the latter condition and brought its case to MGM’s bankers — Goldman Sachs & Co. — to delay the meeting for 24 hours, the SEC document said. Goldman declined to do so without the breakup fee, and MGM’s board approved the Sony deal later that day.
Perhaps most puzzling is that early on in the auction, Time Warner had nearly three weeks of negotiations with MGM without any hint of competition from Sony.
According to the SEC document, on Aug. 27, Time Warner was solidly in the lead — it had raised its bid to $11 per share in cash, resolved most of its contractual issues (including agreeing to a $150 million “business interruption” fee) and MGM’s negotiations with Sony had all but halted.
What’s more, MGM’s largest individual shareholder, Kirk Kerkorian, appeared to be in favor of a Time Warner deal.
Time Warner had engineered a separate deal for Kerkorian, agreeing to give him a large block of Time Warner stock (about 90 million shares, worth $1.575 billion at the time) in return for his MGM shares.
It had been speculated that Kerkorian preferred a stock-for-stock deal that would ease his personal tax blow.
But on Sept. 9, Sony swooped in with a sweetened bid — $12 per share in cash — and agreed to make the breakup fee non-refundable. About three days later, on Sept. 12, Sony notified MGM that Comcast could become an investor in its consortium which also included private equity firms Providence Equity Partners, Texas Pacific Group and DLJ Merchant Banking Partners.
A few days later, after Sony had been named the winner, Comcast agreed to become an investor in the consortium.
Just what made Time Warner change its mind and continue to pursue Sony is not clear. However, an Oct. 31 report in The New York Times speculated that Time Warner’s interest was piqued when it was announced that Comcast was involved in the deal.
PARSONS’ VIEWPOINT
On a conference call discussing its third-quarter results last week, Time Warner chairman and CEO Richard Parsons admitted that the media giant tried to negotiate with MGM after it had withdrawn its bid, but offered a slightly different explanation.
“After we withdrew, probably a week or 10 days after, several of our strategic partners on other fronts came to us and said: 'We think if we could get access to some of that product and drive it through our own format it has value to us and we can add value to your bid without taking away from your economics. Would that be interesting to you?’ We said it would be,” Parsons said on the call.
“We circled back with MGM and asked if they could give us a couple of days to explore that because we thought we might be able to come back to them with a more interesting bid. They said only if we gave them $150 million non-refundable. We said 'pass,’ and they went on and did what they did.”
