Lions Gate reveals merger proposal details as MGM urges creditors to reject it


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With a key voting deadline set for Friday, Lions Gate Entertainment and Metro-Goldwyn-Mayer made new disclosures Monday morning in an effort to sway support of the latter studio’s creditors.

In a regulatory filing, Lions Gate, for the first time, publicly disclosed the details of its non-binding offer to merge with MGM. In order to get MGM’s approval to reveal the information, which was previously protected under a nondisclosure agreement, Lions Gate had to agree to let MGM’s board of directors and management send a letter to creditors responding to the proposal.


The studio’s board raised several questions in its dispatch about the wisdom of Lions Gate’s offer and reiterated support for a proposed prepackaged bankruptcy and merger with Spyglass Entertainment. That plan would put the chief executives of Spyglass in charge of a recapitalized and retrenched MGM.

The creditors, who control the future of MGM because the studio can no longer pay interest on its debt, are scheduled to vote on the Spyglass plan by Friday. Creditors would own 95% of the studio’s equity, with the remainder owned by Spyglass.

As previously reported, the Lionsgate proposal would give MGM creditors 55% of the equity in a merged company along with $500 million in debt or cash.

In Monday morning’s filing, Lions Gate disclosed much of its financial assumptions for a merged company. Among them: layoffs of 174 employees, bringing the new company’s headcount down to 835. Lions Gate currently employs about 525 and MGM about 400.

Total annual overhead costs would be between $166 million and $171 million, Lions Gate said, a savings of more than $100 million per year.

Lions Gate expects the merged company to have pre-tax cash flow of negative $48 million in 2011, but then grow to positive pre-tax cash flow of $121 million in 2012. That figure is projected to grow to $731 million by 2016.


The combined MGM and Lions Gate would make 16 movies per year, four of which would be big-budget tentpoles such as ‘The Hobbit’ and James Bond sequels, co-financed with other studios. The other 12 would be the type of targeted genre pictures that are currently the heart of Lions Gate’s motion picture business, like the ‘Saw’ horror films and Tyler Perry comedies, with budgets of $25 million to $35 million.

Much of the growth for the new company, Lions Gate said, would come from that studio’s expanding television production business. After a merger, the company said, it could make new programs based on MGM’s intellectual properties. There would also be savings from combining the two studios’ libraries, which together total more than 20,000 movies and TV episodes.

The combined company’s board of directors would have 10 members -- four appointed by MGM, three by Lions Gate, and three independent. As Lions Gate’s largest shareholder and a leading creditor of MGM, Carl Icahn would control one of each company’s designated seats.

MGM did not publicly disclose the content of its letter to creditors Monday. A person who has seen the letter but requested anonymity said MGM noted that it could take several months to analyze Lions Gate’s financial assumptions and therefore would delay the bankruptcy proceeding necessary to free MGM from its current state of paralysis. Additionally, MGM’s letter noted that although Lions Gate has said that Icahn and its other leading shareholders support the deal, they have not signed any documents committing themselves to do so.

MGM is worried that Icahn, who is in a long-running dispute with Lions Gate management and is attempting to take control of that studio, could withdraw his support for the proposed merger under the current terms, said the person who read the letter.

The disclosure of Lions Gate’s proposal makes moot a complaint made last week by Icahn, as part of his offer to buy up more of MGM’s debt, that MGM wouldn’t allow Lions Gate to divluge the details of its merger proposal. Icahn is attempting to increase his MGM stake of about 12% to more than 33%, which would enable him block approval of the Spyglass plan.


If lenders vote in favor of the Spyglass deal Friday, it would kill the Lions Gate merger proposal for the moment, though the company and Icahn could make another play for MGM in Bankruptcy Court or after that process ends.

-- Ben Fritz


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