Lions Gate, MGM in merger talks

Lions Gate Entertainment, the embattled studio under siege from dissident investor Carl Icahn, has been holding merger discussions with the management of beleaguered Metro-Goldwyn-Mayer, according to people close to the situation.

The talks, if successful, could result in a powerful independent studio with a library of thousands of movies and television shows that would be run by Lions Gate’s management team.

People with knowledge of the discussions said that Lions Gate Chief Executive Jon Feltheimer and Vice Chairman Michael Burns were pursuing a merger with MGM to fend off a takeover attempt by Icahn, who has accumulated nearly one-third of Lion Gate’s stock and has threatened to wage a proxy war to gain control.

However, the people said the talks were fluid and Lions Gate had not presented a specific merger proposal. Moreover, such a transaction would face significant hurdles.


Lions Gate would first have to win Icahn’s approval, which it might accomplish by granting him board seats as part of a settlement to stave off his proxy war. Icahn opposed a $1.4-billion offer Lions Gate made to acquire MGM earlier this year, and the bid was subsequently withdrawn.

Icahn could not be reached for comment.

MGM is looking for a way to avoid bankruptcy as it struggles with $4 billion of debt, much of which it incurred several years ago in a leveraged buyout by an investor group.

The 86-year-old studio’s top debt holders have been pushing the company to reorganize in a so-called pre-packaged bankruptcy. The creditors have been in talks with film finance and production company Spyglass Entertainment and with “Twilight” studio Summit Entertainment about taking over MGM under such a scenario.

For a merger with Lions Gate to go forward, MGM creditors would have to bless the transaction or be repaid the substantial amount of money that they are owed by MGM’s current owners, which include private equity funds Providence Equity Partners and TPG Capital.

Spyglass and Summit have their own plans for MGM and have been awaiting word about where their proposals to run the studio stand.

Under its plan, Spyglass would substantially reduce MGM’s approximately $150million in annual overhead costs by slashing staff and outsourcing theatrical distribution, people close to the situation said.

Under the Spyglass plan, the downsized MGM would probably relocate from its costly leased headquarters in Century City, and produce only a few films each year. The studio would be run by Spyglass co-Chief Executives and founders Gary Barber and Roger Birnbaum, who would receive a small equity stake in MGM while the majority would be owned by bondholders who would swap their debt for equity, people close to the situation said.


In Summit’s plan, its executives would run the combined company and oversee the production and distribution of its movies.

Both Spyglass and Summit recently made presentations to top MGM creditors, including Anchorage Advisors, Highland Capital Management and Davidson Kempner Capital Management, explaining their visions for keeping MGM a going concern.

Any agreement between Spyglass or Summit and MGM’s largest creditors would have to be approved by all of the studio’s debt holders.

Proposals by current MGM management — including a plan by motion picture group Chairwoman Mary Parent to recapitalize the studio, as well as a $1.5-billion acquisition offer by Time Warner Inc. — have not been formally rejected by creditors but are considered long shots by people close to the company.


A fifth forbearance of MGM’s interest payments on its nearly $4-billion debt load granted last month by creditors is set to expire July 14.