Erstwhile enemies partner on offer for troubled studio

Lionsgate’s surprise move to team with Carl Icahn on a plan to merge with MGM has muddied the future of the storied studio but is likely to draw serious consideration from those who control its fate.

More than 100 MGM debtholders already face a Oct. 22 deadline to vote on a rival reorganization proposal. It would leave Spyglass Entertainment toppers Gary Barber and Roger Birnbaum in charge and wipe out the debt-ridden studio’s existing equity with a pre-packaged bankruptcy. While MGM had no comment on Tuesday’s move, analysts said it’s clear Lionsgate’s proposal will generate intense scrutiny from the lenders.

“Lionsgate has always coveted MGM,” said analyst Matthew Harrigan of Wunderlich Securities. “They obviously feel that it’s mismanaged and that they could do a better job of managing it.”

Lionsgate is offering about $1.8 billion in stock and debt that would give MGM debtholders a 55% stake in the company. Some MGM debtholders would end up with $400 million in new debt.

As of Tuesday afternoon, Lions-gate had not received a response from MGM creditors or its board.

The Lionsgate proposal would most likely require a pre-packaged bankruptcy, too — and it’s unclear whether MGM would move back its Oct. 22 deadline for the Spyglass combo given this new offer.

Lionsgate’s been pursuing a possible combo with MGM for three years, pre-dating Icahn’s emergence as an activist shareholder at the company. Icahn’s accumulated an undisclosed amount of MGM debt. But even if he had not, Lionsgate execs would have pursued MGM, a source said.

Lionsgate’s proposed merger would combine two of Hollywood’s biggest libraries and a significant presence in film and TV production and distribution. Such a combination could make the Lionsgate bid particularly attractive, since Lionsgate distributes its own movies and the combined studio would not have to rely on an outside distributor.

“The question then for MGM’s creditors is ‘Do I want a larger stake in a company with less scale, or do I want a smaller stake in essentially what would be a mini-maxi major?,” said David Bank, an analyst at RBC Capital Markets. “This offer is definitely worthy of consideration on the part of MGM debtholders.”

The bid comes after months of battling between the top execs at Lionsgate — Jon Feltheimer and Michael Burns — and Icahn, due to his efforts to take control of the mini-major. As part of that battle, a hearing began Tuesday in a Canadian court over Icahn’s efforts to void a poison pill and a debt-for-equity swap with Mark Rachesky that diluted Icahn’s equity stake in the company. The session is scheduled to last three days; the court can issue a decision at any time during or after the hearing.

Icahn declared Tuesday that the potential MGM deal won’t halt his lawsuit against Lionsgate over theRachesky transaction. “Whether or not we prevail in those lawsuits, we intend to continue to support a combination of Lionsgate and MGM,” Icahn said.

Still, it seems there is a detente as the two sides team to push for a merger between Lionsgate and MGM. “This is a tacit admission by Icahn that he’s more comfortable with Feltheimer and Burns running MGM than he is with Spyglass,” Harrigan added, referencing the fact that Icahn already holds a significant stake in MGM’s debt.

As to the surprising development of Lionsgate and Icahn playing nice, Bank added: “Maybe we should have seen this coming, but everything in this process has been strange with Icahn.”

The Lionsgate proposal comes with MGM management wanting to push harder into creating TV programming — an area in which Spyglass’ Barber and Birnbaum have little experience, while Lionsgate has a thriving TV business. A combined company also would control half of Viacom’s nascent premium channel Epix. Netflix recently agreed to pay Epix’s partners more than $900 million for the rights to stream their movies for the next five years.

As a publicly traded company, Lionsgate would also provide liquidity to help fund new movies and TV shows; that would not be the case with a combined Spyglass-MGM.

One former insider said the Lionsgate merger could be attractive to debtholders because it promises to return MGM to the Hollywood game more quickly than it would under the Spyglass deal. That’s because Lionsgate’s been consistently growing for the past decade via acquisitions and internal expansion, putting it on track to generate annual revenues of $2 billion. Spyglass has a solid track record of film production, but Barber and Birnbaum might need years to find enough funding to turn MGM back into a significant Hollywood player.

In documents filed Monday, Lionsgate said it had sent a proposal earlier in the day to MGM after holding detailed discussions with Icahn. It added that in addition to Icahn, who holds a 33% stake in Lionsgate, the other top shareholders, MHR Fund Management and Capital Research, support a tie-up with MGM.

The proposed pre-packaged bankruptcy plan for MGM has been hammered out in recent months in talks with Spyglass following discussions with MGM’s largest creditors — Anchorage Advisors and Highland Capital. Spyglass honchos Barber and Birnbaum, who signed a nonbinding letter of intent last month, would serve as the top execs of the new company. Under that scenario, lenders would exchange $4 billion in debt for a 95.3% stake; Spyglass and its affiliates would hold the remaining stake.

A source familiar with the situation indicated that MGM’s position is that the studio is no longer for sale unless its debtholders reject its plan to combine with Spyglass. But another source indicated that since MGM’s privately held, it can entertain offers up until the point that it files for bankruptcy.

Tuesday’s move is the second by Lionsgate to merge with MGM. Earlier this year, its $1.4 billion offer was spurned by MGM. Other suitors rejected by MGM were Time Warner and billionaire Len Blavatnik’s Access Industries.

Lionsgate’s a leading mini-major best known on the feature side for Tyler Perry comedies, “Precious” and the “Saw” franchise, and in TV for shows including “Mad Men,” “Weeds” and “Nurse Jackie.” With “The Expendables,” Lionsgate’s cracked the $100 million mark at the domestic box office for the first time. MGM would bring a library of 4,000 films, including the James Bond franchise and half-ownership of “The Hobbit,” which hasn’t yet been greenlit.

With the formidable library Lionsgate already has — 12,000 video titles — the addition of MGM’s would create even more opportunities, particularly on emerging platforms like Netflix’s streaming service.

“We believe that this combination of Lionsgate and MGM would enhance value for all constituencies,” Icahn said in a statement, “and we believe this proposal as submitted is far better for MGM holders than the current proposal to combine MGM with Spyglass.”

In MGM’s 86-year history, ownership of the studio has changed hands no fewer than 10 times, including three stints under billionaire Kirk Kerkorian and a 74-day stay in Ted Turner’s empire. Turner, as it turned out, couldn’t manage the studio’s debt and sold MGM back to Kerkorian in 1986, except for the pre-1986 library of films.

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