Despite Spyglass victory, investor will still play a key role in MGM's future

Although Spyglass Entertainment won the contest over who will take charge of financially troubled MGM, billionaire investor Carl Icahn will continue to play a major role in the studio’s still-murky future.

According to several sources familiar with the situation, Icahn was among debtholders who supported the plan that would place Spyglass toppers Gary Barber and Roger Birnbaum in charge of MGM — despite his initial opposition and his strong backing of a rival plan to merge with Lionsgate Entertainment.

But in approving the Spyglass proposal, Icahn, who is a major MGM debtholder, apparently convinced his fellow creditors to significantly alter the plan. The revamps include giving Icahn a seat on the MGM board; removing more than a dozen Spyglass library titles from the deal — which significantly reduces the Spyglass stake from the planned 5% level — and winning a pledge of good-faith negotiations with Lionsgate on a possible merger.

Icahn owns 33% of Lionsgate. A source close to the situation said he has also accumulated 18% of MGM’s debt. With such large stakes in both companies, speculationhas grown over the weekend that he would renew his push for merging the two companies.

Despite a long-running battle with Lionsgate management, Icahn had joined forces with Lionsgate in mid-October to offer the rival plan that would give MGM debtholders 55% of the combined company in a deal valued at about $1.8 billion in stock and debt. In a recent letter to MGM creditors, Lionsgate topper Jon Feltheimer asserted that an MGM-Lionsgate merger could generate annual savings of $100 million.

MGM’s ongoing saga reached a key milestone Friday when the studio issued a brief statement confirming that the lenders had backed the Spyglass plan, but provided no other specifics.

Barber and Birnbaum are to take charge of the studio in as little as 30 days through a prepackaged bankruptcy that could be filed as early as today.

“MGM will now move expeditiously to implement that plan, which will dramatically reduce its debt load and put the company in a strong position to execute its business strategy,” the studio said in a statement.

If the lenders back down on the current plan and accept an alternative bid, Spyglass could be in line to receive a breakup fee of more than $4 million.

The Spyglass plan wipes out existing equity in MGM and swaps $4 billion in debt for more than 95% of the equity in the reorganized studio.

MGM has been hobbled by its crushing debt, leaving it a shell of its former self with barebones film and TV production.

Once the court approves the bankruptcy plan, Barber and Birnbaum are expected to cut staff and overhead; seek a distribution partnership; revive stalled projects such as the 23rd James Bond film; and find a way for MGM to co-finance “The Hobbit” films with New Line. They’re also anticipated to beef up TV operations in the cable area.

MGM was put up for sale a year ago but failed to draw bids that were high enough to satisfy the creditors, including a $1.5 billion offer from Time Warner. MGM’s valuations were driven down by the stumbling economy and the depressed market for DVD sales — a factor that’s been driving the majors to hold down costs and explore potential consolidation.

The uncertainty over the future of MGM was underscored last week when Lionsgate filed an unusual lawsuit against Icahn, slamming the billionaire with accusations of duplicity in trying to take over MGM. The action alleges that Icahn undermined efforts earlier this year by Lionsgate to acquire a stake in MGM so that he could acquire part of MGM’s debt, then merge the two studios after acquiring large positions in both companies at depressed prices.

Lionsgate also alleged in the suit that Icahn tried to block its attempts to merge with two other unnamed studios in June by threatening to challenge those transactions and to sue any entity that interfered with his takeover offer for the company. It’s believed that Summit Entertainment was one of those potential partners.

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