Even Hollywood wouldn't buy MGM script

The headquarters of the MGM movie studio is pictured in Los Angeles November 12, 2007.

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Jeffrey Goldfarb

NEW YORK (Reuters Breakingviews) - No Hollywood producer would put the tortuous MGM saga on screen. Activist investor Carl Icahn roundly mocked, and blocked, an earlier plan to combine the storied but troubled studio with Lions Gate.

He now supports the idea -- but isn't withdrawing his tender offer to buy Lions Gate, a Canadian filmmaker, nor dropping his lawsuit against it. The merger change of heart looks sensible, though the tale remains fantastical.

MGM has been limping towards a denouement for a while. Lenders have granted forbearance seven times on payments due on some $4 billion of debt largely piled on in an ill-fated 2005 leveraged buyout. After rejecting proposals from Time Warner and others, a prepackaged bankruptcy plan was filed last week that would hand creditors 95 percent of the company and install the founders of small production company Spyglass Entertainment at the helm.

Lions Gate was once in the mix. That was before Icahn decided it was a bad idea to unite MGM, best known for the James Bond franchise, with the producer of the hit TV show "Mad Men" and the Oscar-winning "Precious."

He likened the deal to "tying two one-legged men together" and to an already overburdened homeowner buying a bigger house.

In the latest twist, Icahn has come around. The merger plan would give MGM's creditors 55 percent of the combined company and Lions Gate shareholders the rest. With his holdings, Icahn would end up with around a fifth of the merged entity.

Based on Lions Gate's $1.05 billion market cap, the proposal values MGM at about $1.25 billion. That's less than previous bids, and also probably less than assumed in the bankruptcy plan with Spyglass. That could leave MGM's creditors balking.

But Lions Gate offers better growth prospects. While MGM has suffered a precipitous decline in cashflow from its library, Lions Gate's has improved of late thanks to a steady stream of new productions. The cost savings from selling the 16,000 titles together could be lucrative too.

Icahn, though, remains a potentially divisive force. He has proved an aggressive and persistent stakeholder in both companies and his legal action against Lions Gate suggests he may yet want to install his own executives. The prospect might be enough to make other investors roar in opposition.

CONTEXT NEWS

-- Lions Gate Entertainment sent a merger proposal to Metro-Goldwyn-Mayer Studios on Oct. 11, following detailed discussions with Carl Icahn, the activist investor who owns a big equity stake in Lions Gate and a slug of MGM's debt.

-- "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 in a statement.

-- MGM, home to the James Bond and Pink Panther film franchises, proposed a pre-packaged bankruptcy plan on Oct. 7 that would wipe out $4 billion in debt and put the founders of Spyglass Entertainment at the helm. The plan provides for MGM's secured lenders to exchange the outstanding debt for about 95 percent of the company's equity upon emerging from Chapter 11.

(Editing by Richard Beales and Martin Langfield)