MGM/UA signs partner for rebuilding program; partnership to help fund Rocky V, James Bond movies.

MGM/UA signs partner for rebuilding program

Partnership to help fund Rocky V, James Bond movies

Despite the pending deal to sell its assets to Pathe Communications for $1.31 billion, MGM/UA Communications Co. is going ahead with a rebuilding program bolstered by a financial commitment from a Winter-Park, Fla.-based investment group. Star Partners III Ltd. was organized this year to help finance MGM/UA's ballyhooed rebuilding plan.

The rebuilding program was announced to shareholders in January by Jeffrey C. Barbakow, chairman and chief executive officer of the Culver City-based movie company. He said that a new focus "on building (its) operating entities" was the order of the day. MGM/UA, a $876.5 million (1989 operating revenues) company, had budgeted to produce 15 films during the next several years.

If all goes as planned, the rebuilding program will get a shot in the arm from Star Partners, a $50 million to $75 million limited partnership.

The Star Partners III prospectus has just been released. The offering is scheduled to close in August. Seeking to sell 5,000 units at $1,000 per unit, the offering boldly claims "unlimited profit potential and limited risk," according to a letter signed by Allen J. Schwalb, general partner of Star Partners.

A network of regional and local brokers are handling the offering. None of the major Wall Street houses are involved.

Star Partners III will co-finance Rocky V, an unnamed James Bond film and at least three other MGM/UA films slated to start filming by 1991. Star Partners III could inject between $41.20 million and $61.8 million (82.4 percent of total raised through the offering) into those and other MGM/UA productions. The offering includes provisions to co-finance two more films, with an option to buy into other projects.

"Basically, the limited partnership is a capital formation tool that many of the studios have used before," said Joseph M. Harvey, securities analyst at Shrewsbury, N.J-based Robert A. Stanger & Co., which specializes in limited partnerships. "How cheap or expensive the capital is to MGM/UA depends on how well the movies do after production."

Rebuilding MGM/UA into a major movie production company again is a tall order. Failed 1989 bids by Qintex Australia Ltd. and media mogul Rupert Murdoch to buy MGM/UA put the studio into a production freeze frame. Analyst Jeffrey Logsdon, of Los Angeles-based Seidler Amdec Securities Inc., estimated that it would cost $300 million a year for each of two years to get MGM/UA back to major studio status in both production and distribution.

"The partnerships are a way for publicly traded MGM/UA to finance their movie productions without loading up their balance sheet with debt," said Harvey.

Rebuilding is an even bigger challenge for Barbakow these days. Yet another suitor, Beverly Hills-based Pathe Communications, has offered to buy the company for $1.31 billion on or before October 23.

As part of the much-publicized deal, Pathe has already placed $200 million into escrow. It is due to make a $53 million escrow payment for MGM/UA July 16. A $4 a share payment is due shareholders July 20 from the $253 million deposited in the escrow account (plus the interest earned).

The deal is on shaky ground because New York-based Time Warner Inc. filed a $100 million lawsuit earlier this month alleging that Pathe violated the terms of a crucial, guaranteed $650 million loan from Time Warner. Pathe could issue its response to the lawsuit in the next few days, according to a Pathe source.

Star Partners III includes provisions for a change in ownership, stating that "the proposed acquisition of MGM/UA, if completed, will have no effect on the legal obligations . . . to the partnership or the joint venture."

MGM/UA has dusted off an old tack to get back on track. A major form of film financing in the 1980s, entertainment limited partnerships were slammed hard by the media, including Forbes and Business Week, in recent years. It is no longer a common form of film financing, Harvey said.

The Walt Disney Co. raised $893 million through three partnerships in 1985, 1987 and 1989. Disney's three partnerships have produced promising returns for investors. The partnerships helped Disney turn its studios around, Harvey said, which is exactly what MGM/UA is attempting.

"One of the knocks on entertainment limited partnerships is that it cuts into shareholder's earnings," said Harvey. "But in Disney's case it helped produce earnings for shareholders. Disney did not have much of a studio before the partnerships. There were not many people interested in investing in Disney films in the mid-1980s. Because of the partnerships, Disney was able to start cranking out the hits that put it on its feet."

Many other partnerships, primarily with smaller studios, have washed out, Harvey said.

"They press jumped all over the limited partnerships because, overall, returns on the limited partnerships have not been substantial," he said. "They are also slow to develop. It typically takes five years before a film is released on all of the markets. It is definitely a long-term investment."

"The thought has been that Pathe wants to acquire an active motion picture company," said Thomas P. Carson, chief financial officer at MGM/UA.