Sources Say MGM Is Talking Merger With Cable Firms

As struggling Metro-Goldwyn-Mayer announced another top management change Wednesday, the Hollywood studio continued to explore several strategic alliances, including a possible merger with Cablevision Systems Corp.’s four national cable services, according to executives close to the discussions.

MGM is also close to finalizing a deal under which Twentieth Century Fox Film Corp. would distribute its films, television shows and home videos internationally, sources said. A Fox source said the company is eager to be in business with MGM in part because Rupert Murdoch, chairman of Twentieth’s parent, News Corp., wants to buy the company outright.

Cablevision is eager to exploit MGM’s film and television library to build its cable channels: Bravo, Independent Film Channel, American Movie Classics and Romance Classics.

Sources stressed that the talks between Cablevision and MGM may not be successful, and both companies are exploring options with other partners. Neither company would comment.

Both are under pressure to expand in an industry dominated by giants that own both production and distribution outlets. While MGM has one of the world’s most valuable film and television libraries, it lacks a cable or broadcast outlet of its own to maximize its benefit.

Cablevision has had difficulty competing for programming against giants such as Time Warner, which is feeding shows such as “ER,” “Friends” and a host of Warner Bros. movies to its cable networks, including TBS, TNT, Turner Classic Movies and the Cartoon Network.

Sources say MGM owner Kirk Kerkorian has had several conversations with Cablevision founder Chuck Dolan, with the most recent meetings in Los Angeles early last week. Dolan and Josh Sapan, president and chief executive of Rainbow Media Holdings Inc., the Cablevision arm that operates the four networks, are scheduled to be in Los Angeles next week to continue discussions.

One source said Cablevision is proposing a stock swap that values each company at about $4 billion.

MGM shares rose 50 cents to close at $14.69 on Wednesday, while Cablevision fell $3 to $80. Both trade on the New York Stock Exchange.

In addition to disagreements over price, sources say the talks could break down because MGM is reluctant to give Cablevision the management control it is demanding.

The merger discussions symbolize the frantic search for partners by the few remaining entertainment concerns that are missing either production or distribution. MGM and Sony Pictures Entertainment, for example, lack outlets for their content; NBC and CBS are missing the movies needed to compete at a time when Walt Disney Co. and Twentieth Century Fox are funneling production to their broadcast and cable channels.

The merger explorations coincide with a management shake-up at MGM. On Wednesday, MGM confirmed the appointment of Chris McGurk as vice chairman and chief operating officer, replacing Robert Pisano. Earlier in the week, MGM Chairman Frank Mancuso was pushed aside for Kerkorian’s key aide in his hotel and casino businesses, Alex Yemenidjian.

The 42-year-old McGurk--who will be the No. 2 executive to Yemenidjian--was granted early release from his contract with Universal Pictures, where he has served as president and COO since 1996. MGM made certain business concessions to Universal in exchange for granting McGurk release from his contract two years early.

Sources said those concessions include a $200-million co-production arrangement; various franchise opportunities involving use of some MGM product and characters in Universal’s theme parks, licensing and other businesses; and all music publishing rights to MGM movies for five years commencing in 2001 when MGM ends its existing agreement with BMG.

MGM also agreed to resolve two pending lawsuits with Universal.

Over the last several months, Dolan has changed his mind several times about Cablevision’s strategy, according to sources. He has considered capitalizing on the staggering values that cable systems are fetching from buyers such as Comcast, Adelphia Communications and AT&T.;

Sources say Cablevision has discussed selling certain of its large cable systems to Comcast. Before AT&T;’s recent bid for MediaOne, the phone giant had been pursuing a purchase of all of Cablevision’s cable systems, which reach roughly 3.4 million subscribers, with dominant holdings in New York.

Sources say Time Warner Vice Chairman Ted Turner would like to buy the four national cable services, and News Corp. is interested in purchasing Cablevision’s interest in certain of the regional sports channels that are part of Rainbow. Barry Diller, the chairman of USA Networks Inc., also has offered to buy one or more of the national services, most recently being rebuffed by Cablevision after offering a staggering $750 million for Bravo alone.

Some industry executives wonder whether Dolan is ready to part with any of his assets. “He can’t be serious about selling if he didn’t take Diller’s offer,” said one cable executive.

Indeed, Dolan seems to be pursuing several paths at once. Cablevision even offered recently to buy NBC for $10 billion, sources said, and has talked with Sony about merging the entire company with the Japanese conglomerate’s American operation.

In his new role at MGM, McGurk will be responsible for all of the operating divisions of MGM. His primary focus, however, will be to rebuild the studio’s beleaguered movie operation and bulk up television production. A poor stepchild to the other Hollywood majors, MGM has struggled for years with generally poor-performing movies at the box office that recently included “The Mod Squad,” “The Rage: Carrie 2” and “At First Sight.”

McGurk is expected to make some key executive changes in the movie division, headed by Michael Nathanson on the MGM side and Lindsay Doran at sister label United Artists.

Universal Studios President Ron Meyer said the company has “no plans to bring in anyone from the outside” to replace McGurk. Rather, his duties will be assumed internally by key business executives, among whom is Brian Mulligan, executive vice president, operations and finance.

Before joining Universal, McGurk was a top deal-maker at Disney for eight years, most recently as president of the Motion Pictures Group, where among other chores he helped former studio chief Jeffrey Katzenberg engineer the $70-million acquisition of Miramax. Katzenberg recruited McGurk to Disney from PepsiCo, where he spent six years in various capacities including chief financial officer of Pepsi Cola East.

McGurk, who comes from a blue-collar background in West Springfield, Mass., said his mandate at MGM is to “get the operations running as effectively as possible and to create value with strategic initiatives and growth opportunities that will help position the company in the next century.”