New reports this week say that the movie studio MGM, which has been for sale since last fall, isn’t getting the kinds of bids it expected and is now seriously considering prepackaged bankruptcy. According to author Edward Jay Epstein, the author The Hollywood Economist: The Hidden Financial Reality Behind the Movies, the low bids, which are said to be just $1.5 billion—a far cry from the $5 billion MGM was bought for in 2004—trace back to a conference call about the studio’s TV revenues.

This post is the ninth in a series celebrating the publication of The Hollywood Economist. Click here to read all posts in the series.

The bad news came in a non-public conference call on February 22, 2010, to the 140 banks and hedge funds holding nearly $4 billion in MGM debt. MGM CEO Stephen F. Cooper, the turn-about specialist brought in to save the once-proud studio, revealed that the secret numbers memo circulated to potential buyers in the deal had been seriously inflated by MGM’s own over-optimistic estimate of its 2010 television revenue. The memo, which had been sent out by Moelis & Company to solicit offers from potential buyers, stated that “Television distribution has generated over $500 million of Library cash receipts in each of the last four fiscal years,” and it estimated that it would produce “$529 million” for fiscal 2010, which ends March 31. As it turned out, this number was inflated by about $120 million.

A library is made of two components: DVD sales and the licensing of movies and TV series to pay-TV channels, cable networks, and broadcast television. So, with the DVD market collapsing in 2009, the stability of television revenue, as represented in the memo, was (at least until the conference call) a key selling point to the remaining potential buyers: Time Warner, Lionsgate, John C. Malone’s Liberty Media, Rupert Murdoch’s News Corporation, Ryan Kavanaugh’s Relativity Media, Anil Ambini’s Reliance ADA Group, and Leonard Blavatnik’s Access Industries. Now, Cooper had stunning news. He told the 140 creditors that the library sales had been anything but stable, and plunged in the fourth quarter (so far) to the extent that the estimate had to be reduced by almost $30 million for that quarter. If annualized, this would amount to a decrease of about $120 million in revenue. Even worse, this severely reduces the value of the library since, as those in the business know, when MGM renews its multi-year contracts, the money it will get for aging product will drop precipitously. In MGM’s case, as I pointed out previously, a large part of these revenues must also be split with “third parties.” This includes producers, stars, directors, writers and Hollywood guilds, and, in 2009, amounted to over 40 percent of the total take.

The forbearance that MGM’s creditors extended to MGM expires on March 31. Now all the remaining bidders will have to drastically recalculate, if not reconsider, the amount they are willing to gamble. The Wall Street investors who put up most of the equity for the 2004 takeover have already seen their investment effectively wiped out. The suspense that remains in this Hollywood thriller is the degree to which the bond-holders will suffer the same fate. The bond holders cannot put the company in bankruptcy without jeopardizing the valuable remake rights to James Bond movie. So if the bidders pull out, or offer only pennies on the dollar, the only alternative open to the bond holders is to themselves takeover MGM by swapping their debt for equity—but this is not the Hollywood ending they want.

Edward Jay Epstein studied government at Cornell and Harvard, and received his Ph.D from Harvard in 1973. His master’s thesis on the search for political truth (Inquest: The Warren Commission and the Establishment of Truth) and his doctoral dissertation (News From Nowhere) were both published as books. He is also the author of The Big Picture: Money and Power in Hollywood.