The creditors of Metro-Goldwyn-Mayer face a crucial decision: whether to approve a prepackaged bankruptcy plan that would reboot the financially hobbled Hollywood studio under the management of Spyglass Entertainment, or pause and weigh a new merger proposal from Lions Gate Entertainment Corp.
Lions Gate, the studio behind the Tyler Perry films and the TV show "Mad Men," on Monday proposed a merger with MGM that won the backing of Carl Icahn, Lions Gate's largest shareholder, who also owns about 12% of MGM's more than $4 billion in debt.
The proposed merger, which would combine Hollywood's leading independent studio with one that has deep roots in the film industry but long ago lost its luster, would hand MGM's creditors a 55% stake in the new company while leaving Lions Gate with a 45% stake. Icahn, by virtue of his holdings in Lions Gate stock and MGM's debt, would emerge as one of the combined company's biggest shareholders.
It also brings together two adversaries: Lions Gate management and dissident shareholder Icahn, who have been feuding for more than a year over direction and control of the studio. That fight is ongoing as Lions Gate and Icahn face off this week in a Canadian court over a lawsuit filed by Icahn.
People close to Lions Gate contend that despite their costly and drawn-out battles, Icahn has swung his support behind Lions Gate Chief Executive Jon Feltheimer and Chairman Michael Burns managing the combined studios. Icahn did not respond to requests for comment.
Lions Gate's proposal values MGM at $1.8 billion, including $400 million in debt, according to a person with knowledge of the plan.
The prepackaged bankruptcy plan, which values MGM at $1.9 billion with no debt, calls for Spyglass to merge with MGM and place Spyglass Co-Chief Executives Gary Barber and Roger Birnbaum in charge in exchange for a 5% stake in the combined entity. MGM's creditors would own 95% of the company.
Creditors' votes on the Spyglass proposal are due Oct. 22. However, Icahn is encouraging his fellow debt owners to push back that deadline to consider a Lions Gate merger.
Although the creditors would have considerably less equity in a merger between Lions Gate and MGM, industry observers point out that a combined Lions Gate and MGM would be a significant player in both film and television and would control a library of thousands of titles.
"The question for creditors is, do you want to own less of the equity but have a company that probably has the ability to create more value?" said David Bank, a media analyst with RBC Capital Markets. "The Lions Gate deal has a host of synergies and scale that are transformative for both companies."
Lions Gate would bring a strong presence in television as well as a robust production and distribution operation focused on small-to-medium budget films to the table.
MGM, meanwhile, has international television channels and a 4,000-title film library with such crown jewels as the James Bond films. In addition, it co-owns rights with Warner Bros. to two movies based on "The Lord of the Rings" prequel "The Hobbit" that are gearing up to start production soon with director Peter Jackson.
Warner Bros. and its New Line unit have been waiting for MGM to give an official go-ahead to "The Hobbit" movies, which are expected to cost nearly $500 million. It's unclear whether the new merger proposal will further complicate the "greenlight" process and delay shooting that is planned to start in January.
Lions Gate's offer could also prolong what has already been an agonizing yearlong effort by MGM's creditors to agree on a plan to salvage the 86-year-old studio.
Over the last year MGM conducted a failed auction during which it attracted several suitors, including Warner Bros. parent Time Warner Inc. and Lions Gate, which withdrew its $1.4-billion offer when creditors deemed it inadequate. Last summer the studio re-approached MGM for merger discussions that didn't result in a deal.
Both Lions Gate and Icahn are awaiting a decision in the Canadian court case, in which the dissident shareholder is asking the court to unwind a controversial transaction that the studio undertook this summer to convert debt to equity for its second-largest shareholder, Mark Rachesky. The move diluted the holdings of all other stock owners, including Icahn, who was knocked down from more than 38% to 33.5%. That frustrated his bid to buy up a majority of Lions Gate's stock and win a proxy vote to take over the studio's board and replace its current management.
If Icahn wins the suit, he will be in a much stronger position to take control of Lions Gate. But if he loses, that effort will be very difficult. Icahn's tender offer to buy all of Lions Gate's outstanding stock for $7.50 a share expires Oct. 22.
In a statement issued Tuesday, Icahn said he would support a Lions Gate-MGM merger even if he loses his legal case.
"We believe that this combination of Lions Gate and MGM would enhance value for all constituencies and we believe this proposal as submitted is far better for MGM holders than the current proposal to combine MGM with Spyglass," Icahn said.