Last Friday, it looked like the inevitable was taking place: Metro-Goldwyn-Mayer announced it had put together a bankruptcy package. The studio behind the James Bond films and Peter Jackson’s on-again, off-again adaptation of J.R.R. Tolkien’s The Hobbit has been wrestling with massive debt since private equity company Providence Equity Partners and Sony (NYSE: SNE) led a $2.85 billion buyout of the company in 2005. The bankruptcy plan would see MGM trade secured lenders $4 billion in debt for 95.3% equity in the company once it comes out of Chapter 11. The company’s lenders had until Oct. 22 to come to a decision.
Now it looks like they may not have to. According to an Associated Press report, film studio Lions Gate Entertainment (NYSE: LGF) has offered to merge with MGM. Shareholders and MGM’s creditors will own the new company formed after the merger takes place. Among those new owners would be financier Carl Icahn, who strongly backs the deal and owns stakes in both studios. Icahn says the new deal is much better than the current proposal to combine MGM with privately held production company Spyglass Entertainment. Terms have yet to be decided on the proposed deal between Lions Gate and MGM.
It’s the latest development in Icahn’s ongoing attempts to acquire Lions Gate Entertainment. The tycoon attempted a hostile takeover of the film studio earlier this year. Already owning a 30% stake in the company, Icahn offered $6 a share for the remaining 70% and was rebuffed when the company instead sold the remaining stake to its president, Mark Rachesky. Icahn later raised his offer to $7.50 per share in August. He is expected to push hard for the acquisition at today’s scheduled annual shareholders meeting. The proposed deal with MGM has obviously changed matters considerably.
2010 has been a decent year for Lions Gate. The summer blockbuster The Expendables with Sylvester Stallone spent two weeks at the top of U.S. box office charts and has grossed $248 million in the two months since its release. MGM has also had luck at the box office, thanks to the modest success of spring comedy Hot Tub Time Machine, which has grossed $61 million, earning well over its $35 million budget. Still, MGM’s financial woes have prevented it from moving forward on its most valuable properties. A 23rd James Bond film starring Daniel Craig in the titular role was scheduled to begin filming this year while the Lord of the Rings prequel The Hobbit has seen its filming date pushed back three times and lost a director in the process.
Lions Gate’s goal to stay out of Icahn’s control may be for naught if the merger with MGM takes place, but that may be for the best. Without debt to hold back MGM’s most lucrative franchises, shareholders in the new company could see significant growth within the next two to three years.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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