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Carl Icahn supports Lions Gate proposal to merge with MGM

October 12, 2010 |  6:28 am

It's a love-hate day for Carl Icahn and Lions Gate Entertainment.

As a hearing in the activist investor's lawsuit against the film and television studio begins in Canada, Icahn announced that he is supporting Lions Gate's new proposal to merge with Metro-Goldwyn-Mayer.

The revelation Tuesday morning provides a major boost to the bid made by Lions Gate on Monday that, as the Times reported, would see it control 45% if the two studios combined, while MGM's creditors would get 55%. Icahn would be a major player in any such deal as he is Lions Gate's largest shareholder, with 33.5% of its stock, and has recently bought up close to 10% of MGM's debt.

Icahn had previously told people close to MGM that he wanted a merger of the two companies, a reversal of his previous position. However, he never previously publicly supported a specific deal.

"We believe that this combination of Lions Gate and MGM would enhance value for all constituencies," Icahn said in a statement. "In addition, we also believe such a combination transaction would enhance the value of Lions Gate shares."

Icahn added, however, that he intends to go ahead with his lawsuit to unwind a controversial transaction Lions Gate underwent this summer to convert debt to equity for its second-largest shareholder, Mark Rachesky. The move diluted 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 the company's stock and win a proxy vote in order 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.

Meanwhile, it remains to be seen how MGM's nearly 100 other creditors react to the Lions Gate merger proposal. They are voting on a plan for a pre-packaged bankruptcy that would see the studio's more than $4 billion in debt converted to 95% of its equity. The other 5% would go to film finance and production company Spyglass Entertainment, which would merge into MGM. Its chief executives, Gary Barber and Roger Birnbaum, would run a reorganized, slimmed-down version of MGM once it exits bankruptcy.

Icahn said in his statement that he believes a Lions Gate-MGM merger would be "far better for MGM holders than the current proposal to combine MGM with Spyglass." He also said that he would support the merger regardless of the outcome of his lawsuit, provided that the combined company has "satisfactory corporate governance provisions."

Lions Gate said in a regulatory filing that its second- and third-largest shareholders, Rachesky and Gordon Crawford, also support the MGM merger proposal. Along with Icahn, they control a majority of the stock of the studio behind the Tyler Perry movies and the television series "Mad Men."

-- Ben Fritz

RELATED:

Lions Gate makes another run at MGM

Icahn taks Lions Gate to court

Spyglass proposes MGM reorganization plan, including prepackaged bankruptcy

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

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