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Why MGM Is Choosing Spyglass Over Others

Why MGM Is Choosing Spyglass Over Others

Why MGM is choosing Spyglass over others
Why MGM is choosing Spyglass over others

With Spyglass Entertainment in final negotiations to become MGM’s strategic partner and part-owner, there’s the related question of why the Lion chose the indie producer above other prospective mates.

Here’s a big reason: Major debtholders are pushing Spyglass because the deal represents a longer-term play and, atypically, the hedge funds holding much of the debt like that. They’re now “underwater,” having bought debt at high prices during the failed MGM auction, so the prospect of raising MGM’s value over time is more appealing than it might be otherwise.

By contrast, a merger with publicly held Lionsgate, another finalist in the Lion’s long-running search for a corporate combo, would force some debtholders to cash out and take their lumps immediately, under stipulations of their financial charters.

MGM’s publicly traded debt, part of a nearly $4 billion debt load, recently has traded closer to 40 cents on the dollar than the 55 cents-60 cents range in which it was trading in late fall amid expectations that the MGM auction would fetch richer bids than eventually proved possible.

“A lot of these hedge-fund guys aren’t educated in the business and were just buying up the debt based on a technical analysis of trading activity,” a well-placed source said. “Well, they’re getting an education now.”

Negotiations still could blow up, but another benefit of choosing Spyglass is the relative simplicity of its major deal points; the company has few assets other than a library of a dozen or so movies. Assuming things go well in the homestretch, a review by the larger group of 100-plus MGM lenders could go quickly, and the MGM-Spyglass combination could be put to a vote by debtholders just after Labor Day and secure approval in time to file for voluntary reorganization in U.S. Bankruptcy Court by Sept. 15.

That’s the latest deadline on more than $400 million in debt and interest payments owed by MGM.

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