MGM-Lionsgate merger plans still undecided

On the eve of what had promised to be one of the biggest proxy fights in recent Hollywood history, Carl Icahn said Monday that he was abandoning his efforts to take control of Lionsgate Entertainment.

Icahn’s decision to give up his tender offer of $7.50 per share comes as Lionsgate’s shareholders prepared to gather this morning for their annual meeting at the SLS Hotel in Beverly Hills.

The decision by Lionsgate’s No. 1 shareholder, with a 33% stake, may have been advanced by a New York judge’s ruling last week that the No. 2 shareholder, Mark Rachesky, could vote shares he obtained in a debt-for-equity swap last summer that diluted Icahn’s position in the company. While Icahn appeared Monday to be backing off on his long-running takeover attempt, the billionaire investor is nothing if not unpredictable, and he didn’t rule out the prospect of a future battle.

“We will continue to monitor the situation at Lionsgate and will aggressively take all actions necessary to protect our investment,” Icahn said in a statement. “We recognize that it is now virtually impossible for us to prevail in the proxy contest due to the dilutive transaction in question.”

It’s not clear how Icahn’s decision will affect his desire to merge Lionsgate with MGM. He owns more than 14% of MGM debt and will become a significant equity holder in the Lion when it emerges from a pre-packaged bankruptcy later this month. But one analyst said Icahn’s decision to drop the proxy fight may foster better cooperation between the investor and Lionsgate’s management team.

“You will see them moving on to the next step of what they both want, and that is pursuing a merger with MGM.” said David Bank of RBC Capital Markets.

Bank said he believes MGM’s creditors may have been skittish about doing a deal with a company at such odds with its largest shareholder. “They may be less reluctant to embrace the idea of a merger now that they see the contentious relationship moving out of the way. One thing is clear: Carl is not going away.”

Lionsgate execs could not be reached Monday for comment on Icahn’s proxy fight decision.

Since Icahn began buying up Lionsgate’s stock and pushing for a takeover earlier this year, the studio has spent more than $17 million defending itself against the investor.

And even though Icahn acknowledged Monday that he can’t win the proxy fight with the current constraints, he was still urging shareholders to vote for his slate of five directors. “We encourage shareholders to voice their dissatisfaction by voting for our slate of nominees on the gold proxy card,” he said. “We thank all those who have voiced support for our effort.”

Major shareholders have said Icahn’s offer of $7.50 per share, which he renewed five times, greatly undervalues the company, which they believe is worth close to $12 per share.

Icahn’s record in the media sector is mixed. While he was successful in installing his slate on the Blockbuster board in 2007, the effort went nowhere; Icahn left the board earlier this year. A year earlier, he tried to place his own slate at Time Warner but backed away when the company said it would accelerate its full spinoff of Time Warner Cable and proceed with a sale of its Internet unit, AOL.

On Monday, Lionsgate’s shares traded down 36¢ to $7.09.

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