Studio, investor to explore mergers, acquisitions together

A temporary truce in the bitter battle between Lionsgate and Carl Icahn will transform the two adversaries into potential dealmakers beginning this week.

Lionsgate’s top execs and the billionaire investor, who already owns nearly 38% of the minimajor’s stock, plan to explore mergers and acquisitions together over the next 10 days. The announcement, which came on Friday, didn’t name a potential target, but insiders have indicated that MGM will be the focus of the Lionsgate-Icahn initiative. The agreement also will temporarily preclude the kind of public criticism that each side has aimed at the other.

Making a deal for MGM presents a complicated scenario, given that the studio is hobbled by $3.7 billion in debt and has asked its debtholders for a sixth extension on debt payments due this week.

Liongate has been in informal talks about an MGM-Lionsgate merger in recent weeks. A combined MGM-Lionsgate would include a library with more than 7,000 titles and the ability to produce and distribute MGM titles — such as new James Bond movies and the two “Hobbit” films, which MGM co-finances with New Line.

Lionsgate already distributes more than a dozen films a year and has grown annual revenues to nearly $2 billion, partly through acquisitions such as Trimark, Artisan and TV Guide.

MGM has also informally discussed scenarios in recent weeks with execs from Spyglass and Summit under which MGM would recapitalize via a prepackaged bankruptcy.

Lionsgate was one of three bidders making a formal offer for MGM earlier this year but withdrew from the bidding in March when MGM asked it to sweeten the bid — believed to be in the $1.3 billion to $1.4 billion range, far short of MGM’s target.

Lionsgate also revealed in a Securities and Exchange Commission filing earlier this year that it had held talks with Icahn about teaming on an offer for MGM last year. But those talks hadn’t been fruitful.

Terms of the truce preclude Lionsgate from issuing new shares during the 10 days and from moving to set its annual meeting before Aug. 24. And once the 10-day agreement ends on July 19, Lionsgate is required to disclose all of the information it shares with Icahn so that the investor will not have any non-public information.

Though the focus during the truce will likely be on MGM, other possible efforts could include involvement in the bidding for Disney’s Miramax library, which hasn’t been finalized.

While a sale of Miramax has been reported as “imminent” for months, the latest round has Disney hammering out a deal to move the specialty label and library of 611 films such as “Pulp Fiction” and “The English Patient” off its lot for $650 million to $675 million, and into the hands of bidders headed by Los Angeles construction magnate Ron Tutor and a consortium of investors that include private equity firm Colony Capital,

Lionsgate disclosed the pact with Icahn in an 8K filing with the Securities and Exchange Commission. “Pursuant to the Agreement, among other things, Lionsgate and Mr. Icahn have agreed to work together on certain acquisition opportunities beginning on July 9, 2010, and ending on July 19, 2010, and Lionsgate agreed to refrain from specified actions during that period,” the filing said.

Shares of Lionsgate were up 8¢ to $6.84 in trading Friday on the New York Stock Exchange.

Icahn completed a $7 a share hostile tender offer on July 1 and has promised to launch a proxy fight to replace Lionsgate’s 12-member board and oust toppers Jon Feltheimer and Michael Burns. Lionsgate responded a day later by announcing a poison pill that will be enacted if Icahn’s stake hits 38%. The company said the plan is designed to avoid a “creeping” takeover, ensure that its board has time to allow competing offers to emerge and to make certain that all shareholders are treated fairly.

Icahn’s stake had been at 19% several months ago when he launched the offer and repeatedly criticized Lionsgate’s board and management for what he sees as overspending — particularly on features — and a misguided strategy of trying to acquire another film library. Icahn said three weeks ago, however, that he wouldn’t dismiss out of hand supporting a merger between Lionsgate and MGM.

During the tender offer, Lionsgate labeled Icahn’s offer “financially inadequate” and “coercive.” The minimajor also blasted Icahn’s investment record, portraying him as an incompetent meddler, and asserted that its fiscal 2010 results show that its management strategy is sound.

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