MGM in deal to cut debt

In a major step toward ending a tortuous yearlong process to reorganize the beleaguered studio, Metro-Goldwyn-Mayer creditors have approved a plan to enter a prepackaged bankruptcy and hand over management to the chief executives of Spyglass Entertainment.

The plan’s passage was enabled by a surprise about-face by corporate raider Carl Icahn, according to three people close to the matter. Previously, Icahn, a major MGM debt owner, was aggressively trying to kill the Spyglass plan in favor of a merger with Lions Gate Entertainment Corp., where he is the largest shareholder.

However, another person familiar with the events insisted that Icahn voted against the Spyglass plan.

In exchange for his support, the three people said, Icahn will receive one of MGM’s nine board seats when the studio exits bankruptcy. In a statement, the company said that the plan was “overwhelming approved.�

A knowledgeable person confirmed that although Icahn was aggressively trying to accumulate more than a third of MGM’s debt to block the Spyglass plan, he ended up with less than 20%. As a result, he decided to negotiate an arrangement supporting the deal.

However, people close to the matter said Icahn still favored a merger of MGM with Lions Gate. Until MGM exits bankruptcy, creditors can switch their support from the Spyglass plan to any other, including a merger with Lions Gate.

MGM’s creditors, who are deciding the studio’s future because it can no longer afford interest payments on its more than $4 billion in debt, undoubtedly would want more favorable terms than the 55% stake in a merged entity they were originally offered by Lions Gate.

As part of the deal with Icahn, MGM agreed to negotiate with Lions Gate in good faith.

Icahn has been in a long-running feud with Lions Gate’s managers, whom he has been trying to oust by seizing control of the studio at the same time he supports their proposal to merge with MGM.

The ongoing animus between Icahn and Lions Gate chiefs Jon Feltheimer and Michaels Burns probably strengthened the hand of those who backed the Spyglass plan — particularly after Lions Gate filed suit against Icahn on Thursday.

MGM is expected to begin bankruptcy proceedings immediately, after which Spyglass principals Gary Barber and Roger Birnbaum will become co-CEOs. They would then run a slimmed-down MGM and produce new films including co-financing “The Hobbit� with Warner Bros.

For more than a year, MGM’s financial straits have prevented it from making new films to replenish its library of more than 4,000 titles. Its only release in the last 12 months was the box-office disappointment “Hot Tub Time Machine.�

Barber and Birnbaum, who have been partnered in the film production and financing company Spyglass since 1998, plan to bring their slate of development projects to MGM, slash overhead at the Century City studio and partner with another major studio to handle the theatrical and DVD distribution of MGM’s films. One likely partner would be 20th Century Fox, which has for years handled MGM’s international and worldwide DVD distribution.

Under the bankruptcy plan, MGM’s creditors will swap all of their debt in exchange for more than 95% of the studio’s equity.

Barring any delays, the Chapter 11 bankruptcy process could last as little as one month.

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