On the Verge of a Showbiz Merger: The Big Picture : Film: Despite lawsuits, heavy spender Carolco Pictures will likely end up with the part of Live Entertainment it doesn’t already own.

Carolco Pictures Inc. and its flamboyant chairman, Mario Kassar, are notorious for their free-spending ways. Carolco pays such stars as Arnold Schwarzenegger and Sylvester Stallone top dollar, throws lavish parties and courts the hottest directors and writers. It gambles on big-budget films, most recently the Schwarzenegger vehicle “Terminator 2,” this summer’s top box-office smash with $159 million, and counting.

Kassar, meanwhile, tools around in his stretch limo and surrounds his Beverly Hills house with security guards. He owns 56% of Carolco’s stock; his 1990 compensation was $3.14 million.

Some industry observers say Kassar, 39, aspires to be a big-time movie mogul. Others say he already is one, particularly after the success of “Terminator 2.” Either way, Carolco is on the verge of consolidating its position as a major Hollywood presence with a proposed merger with Live Entertainment.

The two companies already have close ties. Van Nuys-based Live is a video distributor and retailer born in 1987, when Carolco merged two video companies in which it held interests. Carolco currently owns 54% of Live, and Kassar, Carolco President Peter Hoffman and two other Carolco directors sit on Live’s board. Though Live buys video rights from other film companies, Carolco is by far Live’s biggest supplier of movie titles.

Selling videocassettes makes Live the decidedly less glamorous of the two companies, but analysts say Live will lend some badly needed financial stability to offset Carolco’s erratic performance. Live has nearly three times Carolco’s revenues, a more stable earnings history--Live’s $25.5 million in profits last year topped Carolco by 47%--and Live has about half as much long-term debt.

Carolco hasn’t formally responded to Live’s offer, made in June. Both Kassar and Wayne Patterson, Live’s chairman, declined to be interviewed. A Live spokesman said the proposed deal “works best in the existing legal and financial frameworks of both companies,” and he declined to elaborate.

But some critics think the proposed merger isn’t such a good deal for Live shareholders. Three lawsuits have been filed charging Carolco and Kassar--who has a history of self-dealing accusations--with enriching themselves at the expense of Live investors.

It was Live, however, that technically proposed the merger. Last month Live laid out its terms, a complex swap under which its shareholders would receive $21.50 worth of stock for each share of Live--and no less than two shares--in a new company formed by the merger, while Carolco’s investors would receive one share in the new company for each share currently held. The deal values Live at $263 million.

It’s a confusing arrangement. The day after Live announced its terms, the Hollywood Reporter said the proposal called for Carolco to acquire Live, while Daily Variety reported that Live was offering to buy Carolco. Analysts say the bottom line is that Carolco would acquire the portion of Live that it doesn’t already own.

“Live said, ‘Buy me, big Daddy,”’ said Emanuel Gerard, an analyst at Gerard Klauer Mattison & Co. in New York. “If the kid said, ‘Buy me out,’ the parent winked and said, ‘It’s OK.’ ”

While many other independent production companies have closed their doors in recent years, Carolco’s survival has been pegged in part to its strategy of keeping almost half its profits overseas through a Netherlands Antilles subsidiary--thus holding the tax rate on its movie profits to 22% instead of 34%.

Carolco has also been credited with limiting its risks by pre-selling the distribution rights to its films more aggressively than many other independent movie makers. It hasn’t hurt that the company has guessed right on some big-budget gambles, such as the “Rambo” series and 1990’s “Total Recall.”

But Carolco has also had some duds, for example, “Air America” with Mel Gibson, and it continues to spend freely on upcoming releases. For “Basic Instinct” star Michael Douglas is being paid well over $10 million, and the $3-million fee to screenwriter Joe Eszterhas surpassed all previous deals by far.

The result is erratic earnings. In 1990, Carolco’s profit was $17.3 million on $269 million in revenue, compared to record profits of $35.5 million in 1988. In the first quarter ended March 31, Carolco lost $6.3 million, and it was weighed down with $451 million in liabilities, versus $656 million in assets.

During the past year, Carolco has achieved a measure of stability by forming alliances with some deep-pocketed foreign concerns. Stakes in Carolco have been acquired by the French cable TV company Canal Plus; Japan’s Pioneer Electronic; Technicolor, a subsidiary of the British media concern Carlton Communications, and RCS Video, an affiliate of the Italian media giant Rizzoli Corriere Della Sera Group.

Now, with Live, Carolco would tap into a steady earnings source to offset its volatile movie-making operations. However, analysts expect Live’s 1991 results to trail 1990, owing to the spectacular success of last year’s “Teenage Mutant Ninja Turtles” video and an expected big writedown from the pending sale of its Lieberman Enterprises unit, which delivers videos to retailers.

Live’s stock has languished since the slaying of its chairman, Jose Menendez, who was gunned down with his wife at his Beverly Hills residence in August, 1989. The shares, which traded at $25 before Menendez’s death, closed Monday at $14.75. But analysts are generally optimistic about Live’s long-term prospects.

Even with Live, Carolco is a far cry from a Paramount or a Disney. One key difference is that Carolco doesn’t distribute its films to theaters, which would require enormous sums of cash. On the other hand, said analyst Tom Adams at Paul Kagan & Associates, a Carmel-based media research and consulting firm, “Live’s connection is sort of the equivalent of having theatrical distribution.”

Paul Wick at the New York investment firm J.& W. Seligman & Co., who manages a fund that invests in Live stock, said Carolco might be contemplating theatrical distribution as well, and that’s where one of its foreign investors might come in. Some industry talk has Kassar and RCS Video planning to take Carolco private. Still others suggest that Pioneer or another foreign concern will make a buyout offer for the newly merged company.

Meanwhile, there are those three lawsuits by Live shareholders that seek to stop the proposed merger.

One suit, filed by New York-based Lepow Equities Corp. in Los Angeles Superior Court, alleges breach of fiduciary duty by Live, Carolco and their directors, and says there should be an “appropriate bidding process or the review of strategic alternatives” to the merger. It seeks a court order to stop a merger, as well as unspecified damages. Live and Carolco deny the allegations.

Wick said the disgruntled shareholders have a point. Based on prevailing estimates of 1991 income from Live’s home-video operations, he said, Live is worth at least $27 a share.

This isn’t the first time Kassar has rankled investors. The former film salesman has been criticized for taking interest-free loans from his company, and came under fire for his sale last October of 3.46 million shares of Carolco common stock to the company for $13 each, for a total of $45 million. The highest closing price for Carolco stock during last year’s fourth quarter was $9.25; it closed Monday at $7.625 per share.

Six shareholder complaints were filed--they’ve since been consolidated into one--alleging Kassar and Carolco breached their fiduciary duty in connection with the stock sale. The defendants have denied any wrongdoing, but in December, a Superior Court judge in Los Angeles ordered 2.2 million shares held by Kassar frozen, and prohibited any new loans or payments by the company to Kassar, other than his normal compensation. That order is still in effect and the suit is pending.

Despite some shareholder opposition, however, analysts predict that a Live-Carolco merger is inevitable. And Wick says that’s good news for Live’s shareholders too. “Think of all the independents that tried to make it and didn’t,” he said. “Carolco has something there and people don’t give them credit for that.”

THE CAROLCO PICTURES-LIVE ENTERTAINMENT MERGER Carolco Pictures, a Los Angeles-based motion picture production company, and Live Entertainment, a Van Nuys based home-video distributor that is 54%-owned by Carolco, are considering merging. Despite heavy debts, Carolco has survived the shakeout among independent filmmakers, and is best known for its “Rambo” series, “Total Recall” and this year’s smash hit “Terminator 2.”