Carl Icahn, once opposed, now favors a Lions Gate-MGM merger

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Only three months ago, activist shareholder Carl Icahn frowned upon a potential merger between Lions Gate Entertainment and financially hobbled Metro-Goldwyn-Mayer Inc. In fact, he likened Lions Gate management’s desire to combine with MGM to ‘a couple not being able to pay their mortgage on a little house and starting to negotiate on a big, overpriced mansion that’s rumored to be haunted.’

But since August, Icahn, the largest shareholder in Lions Gate with about 33%, has been quietly buying up MGM debt. More recently he has been aggressively promoting the idea of a merger with Lions Gate, according to people briefed on the matter who spoke on condition of anonymity because they were not authorized to discuss it publicly.

Those people said Icahn has spoken to some MGM debt holders, who control the cash-strapped studio’s future, about the advantages of a merger with Lions Gate in hopes that it would upset a pending deal with the founders of Spyglass Entertainment. MGM recently signed a nonbinding letter of intent with Spyglass chiefs Gary Barber and Roger Birnbaum to take over the management of the studio as part of a prepackaged bankruptcy plan that would see creditors swap nearly $4 billion in debt for equity in the reorganized company.

Icahn, who could not be reached for comment, has told MGM creditors that he now owns close to 10% of the debt, though it is difficult to confirm his exact position. One person familiar with the situation said in mid-September that Icahn then owned a single-digit percentage, which suggests that the activist shareholder has been accumulating more debt.

Lions Gate management, led by Chief Executive Jon Feltheimer and Vice Chairman Michael Burns, has long desired a merger with MGM and as recently as July held talks to make such a deal happen.

Simultaneously, Feltheimer and Burns have been under siege for more than a year from Icahn, who wants to oust the executives and has said he plans to wage a proxy war. Icahn and Lions Gate are currently enmeshed in litigation over a move the studio made to prevent the investor from increasing his stake.

If the two sides could resolve their many issues, it’s possible that Icahn and Lions Gate will jointly push for an MGM merger. Under that scenario, the Lions Gate management team would run the merged entity, which has complementary businesses and would be a formidable competitor in Hollywood with a library of thousands of titles and active movie and television production and distribution operations.

But right now Icahn is doing all the pushing, people close to the matter said, while Lions Gate waits to see if he comes to them with a willing group of MGM lenders. In that case, the two sides would have to jointly decide on the structure of a deal and what role Lions Gate management and Icahn would play in a merged entity.

If nothing happens before a decision is issued in the Lions Gate-Icahn litigation, for which a hearing is scheduled Oct. 12, the situation could change. If Icahn prevails and takes over the company, he could pursue a merger with Lions Gate on his own. Likewise, if the court does not rule in his favor, he may bail out of Lions Gate’s stock and the company could make another run at MGM on its own.

Any merger proposal would also likely have to occur before MGM enters bankruptcy proceedings.

-- Claudia Eller and Ben Fritz