NEW YORK (CNN/Money) -
Time Warner Inc. is in preliminary talks to buy legendary film studio MGM, a move that could spark a bidding war with Sony Corp., a person familiar with the situation told CNNfn Thursday.
But Sony (SNE: up $0.20 to $38.46, Research, Estimates), which has been negotiating to acquire MGM since late April for roughly $5 billion, is still very much in the running, people close to the negotiations told Reuters.
Shares of Metro-Goldwyn-Mayer Inc. (MGM: up $0.18 to $12.84, Research, Estimates) jumped about 5 percent Thursday on news that Time Warner, the world's biggest media company, was in the running.
MGM, famous for its James Bond series and classics such as "The Wizard of Oz" and "Rocky," has been courted recently because of its vast film library of more than 4,000 titles.
MGM would be "a good strategic fit" with Warner Bros., which is expanding rapidly in sales and distribution of DVDs, but the talks between Time Warner and MGM are still in their early phases, the person told CNNfn.
The New York Times and the Wall Street Journal said in their Thursday editions that Time Warner could make a preliminary offer valued at around $5 billion for MGM, but the source told CNNfn that the reported value seems too high for Time Warner (TWX: down $0.03 to $17.38, Research, Estimates).
The Times reported that Time Warner would pay about $13 a share in cash to MGM's shareholders and about $11.50 a share in Time Warner stock to MGM's controlling shareholder, Kirk Kerkorian.
Time Warner, which owns Los Angeles-based Warner Bros. film and TV studios as well as New Line Cinema, which produced "Lord of the Rings," would also assume about $1.9 billion in MGM debt, according to the Journal, citing a source.
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Warner Bros. is familiar with MGM's value as it once distributed the studio's films from its library, according to Reuters. Warner Bros. also owns many of MGM's old musicals, so a combination would reunite venerable MGM titles with its more modern movies.
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| An earlier version of this story misstated the name of Providence Equity Partners. CNN/Money regrets the error.
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Sony and MGM have never quibbled over the proposed price, sources told Reuters, although Sony is said to be having difficulty structuring a partnership to buy MGM with other investors including Texas Pacific Group and Providence Equity Partners.
At MGM's annual meeting in Los Angeles Tuesday, Chief Executive Alex Yemenidjian told shareholders additional "strategic alternatives" had emerged in the bidding for MGM, and the company would take its time to consider all proposals.
"We have more strategic alternatives available to us than we realized, and we need more time to properly explore all our alternatives," Yemenidjian said.
Weighing options
People who knew of MGM's plans told Reuters that the company wants to come to some sort of deal in July. But they also said MGM could choose to stay independent if Kerkorian, the Las Vegas billionaire, can't get the roughly $5 billion he wants.
The Time Warner proposal is said to be attractive to him because Kerkorian would receive Time Warner stock and avoid paying taxes. Just last month, MGM took on roughly $2 billion in debt to pay out an $8-a-share, tax-free dividend.
One other factor may be making MGM attractive to Time Warner. New Line's three "Lord of the Rings" movies, based on the J.R.R. Tolkien novels, have amassed nearly $2.9 billion in ticket sales at global box offices, but there is no fourth Tolkien film to be made.
Unless, that is, Time Warner can get the rights to make a movie based on another Tolkien book, "The Hobbit," and MGM possesses most of those worldwide rights, according to Reuters.
NBC Universal has also been named as a possible suitor, but in the past its executives have said the $5 billion price is too high. NBC Universal is owned by General Electric Co. (GE: down $0.30 to $31.71, Research, Estimates).
MGM and Time Warner declined to comment on the report, while officials at NBC and Sony were not immediately available for comment.
CNN/Money is a subsidiary of Time Warner.
-- Reuters contributed to the story
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