Time Warner Eyes MGM for $1.5 Billion

Still reeling from one of the most troubled mergers in business history, Time Warner (TWX) is looking for new sources of growth.

The company is reportedly the lead bidder hoping to buy Metro-Goldwyn-Mayer for under $2 billion. If the deal materializes, it would happen just a few months after Time Warner unloaded the remains of AOL (the parent company of DailyFinance). And although MGM will likely be bought at a discount, it won't be a bargain basement transaction: Time Warner is willing to spend $1.5 billion for an all-cash deal for the studio and distributor, according to various reports.

It's a good bet that the time is right to make an acquisition -- it's a buyer's market -- but it's not clear how Time Warner will benefit from taking on MGM's debt. By most accounts, MGM's most valuable assets are its library of movies and television titles and its ownership of various franchises, including the James Bond films and a couple of Hobbit films due out in 2012. Although James Bond pictures have grossed a minimum of $160 million each at the U.S. box office in recent years, they're not cash cows. In fact, if the last James Bond picture, "Quantum of Solace" made a profit, it was tiny: The picture grossed a little less than $170 million domestically while having a production budget of roughly $200 million.

The last time MGM was on the block, in 2004, the company was valued somewhere between $4.6 billion to $4.8 billion, and the James Bond franchise was estimated to generate between $25 million to $50 million a year. Of course, the value of the James Bond franchise depends on regular production of new films, and MGM hasn't really had the capital to invest in many new movies. The company's annual revenue has reportedly plummeted from $460 million in 2008 to $280 million in 2010, and it's projected to fall another $60 million to $220 million in 2010. Plus, the company is juggling $4 billion in debt and has a $250 million interest payment due on April 8.

Meanwhile, one of MGM's other reported bidders, Lionsgate Entertainment (LGF), is defending itself in a $574 million hostile takeover launched by corporate raider Carl Icahn. The company rebuffed Icahn's earlier efforts to grow his stake in the company to 30%, and rejected Icahn's offer on Tuesday to buy the company for $6 per share, calling the offer "inadequate."