Carl Icahn May Kill MGM and Spyglass Deal — Here's Why

By embracing Lionsgate's merger proposal, the renegade investor may end Gary Barber and Roger Birnbaum's bid to take over the studio

Billionaire Carl Icahn is planning to use his insider status to get MGM debt holders to kill a bid by Spyglass heads Gary Barber and Roger Birnbaum to take control of the company, TheWrap has learned.

Instead, Icahn is throwing his weight behind a proposal from Lionsgate that would see the indie studio merge with MGM.

Note-holders have until Oct. 22 to vote on Spyglass' plan, which would push MGM into Chapter 11 and bring Birnbaum and Barber on board as studio chiefs.

On Tuesday the takeover king surprised Wall Street and Hollywood by backing the proposed merger with MGM.

After all, he's been hunkered down in a proxy war with Lionsgate for much of the past year.

In terms of return on investment, it makes sense.

Read also: Carl Icahn Backs Lions Gate's Proposed Merger With MGM

"Carl is such an incredibly competitive, volatile guy. He woke up at the ninth hour and said, 'I own 30 percent of Lionsgate, 10 percent of the MGM debt — the best way for me to make money is to put these two companies together,'" Gordon Crawford, a portfolio manager at Capital Research Global Investors and a 9 percent stakeholder in Lionsgate, told TheWrap.

Appeasing Icahn also may explain Lionsgate's rediscovered enthusiasm for the once-fabled, now cash -strapped MGM.

“I can only think that Lionsgate views this as offensive and defensive at the same time," Harold Vogel, head of Vogel Capital Management, told TheWrap. "This is a logical addition to a large library with the potential for creating better efficiencies and pumping more product through their pipeline. At the same time they have a thorn in their side called Carl Icahn affecting their long-term strategies."

Within Lionsgate, executives have long felt a merger with MGM — whose library includes the James Bond series and pending two-parter, "The Hobbit" — was a natural fit for its distribution business and movie and TV production arm.

But until now, Icahn's agitation made the bid a remote option for MGM's debtholders.

All that changed on Tuesday. Lionsgate's proposal coupled with Icahn's cheerleading may prove fatal to the ambitions of Barber and  Birnbaum, who seemingly had locked up the leadership of MGM in a deal announced last week.

Analysts speculate MGM’s note holders may be more inclined to bet on the higher profile Lionsgate than they are to take a flier on the less established Spyglass — a company that lacks a distribution arm.

Lionsgate management believes "that they would be better managers of MGM because they have a history of monetizing libraries. Lionsgate has a significant market share in home entertainment for a company their size and they feel they bring a lot to the table,” Marla Backer, a media analyst with Hudson Square Research, told TheWrap.

It could be a good move for Lionsgate shareholders, too. The drawn-out fight between Icahn and Lionsgate over control of the studio has depressed the company’s share prices. Despite a recent series of hits such as “The Expendables” and “The Last Exorcism,” Lionsgate’s stock currently hovers at $7.34, primarily because of Wall Street’s uneasiness over the outcome of Icahn’s land grab.

“Icahn may not say it, but his move today show that he has to be getting more comfortable with [CEO Jon Feltheimer and Vice Chairman Michael Burns],” Matthew Harrigan, a media analyst with Wunderlich Securities, told TheWrap. “It’s a bit of a kabuki theater.”

Throughout his flurry of tender offers, Icahn has maintained that he is primarily interested in protecting the value of his investment in Lionsgate. He could see that stake nearly double with an MGM merger. Shares may balloon to $14 to $15, according to an individual with knowledge of the deal.

Lionsgate's proposal would give MGM lenders a 55 percent stake in the merged company.

There’s another plum for Lionsgate. Even though Icahn owns a reported 10 percent of MGM’s debt, which he will presumably swap for equity in any pre-packaged Chapter 11 deal, bringing in the studio’s note holders will likely dilute his 34 percent stake in Lionsgate. Translation: He won’t be in a position to call for Feltheimer’s and Burns’ heads or enact any palace cleansing as he has often threatened.

“They could have appeased him long ago, so even though the fact that Icahn is on board is attractive, they’re not guided by that. I’m sure that’s something they’ve taken into account — that this could help get Carl off their backs, but they get to increase their share price at the same time. It’s a win-win vis-à-vis Icahn,” Backer said.

For MGM debt holders, a Lionsgate bid may offer a better chance at recovering the $4 billion the company owes.

"I honestly don’t have any idea [if they'll accept]. Other than the power of logic. This is a very dysfunctional, dispersed group of bond and debt guys. Most of them don’t know the movie or TV or channel business," Crawford said.

It certainly warrants a second look. After all, Lionsgate has a larger library and a real distribution arm, something that Spyglass lacks.

“They have a broader distribution platform than Spyglass, which is a private company. An asset the size of MGM would benefit more from a broad-based public entity. Lionsgate would increase the potential for raising more capital at a more favorable cost,” Vogel said.

In addition to Epix, the cable channel Lionsgate owns with Viacom, the studio has done an impressive job of releasing hit genre films like “Saw” and Tyler Perry’s “Madea” series. Getting its mitts on MGM’s long delayed “Hobbit” and James Bond movies represents a chance for the mini-major to play with the big boys.

For MGM, partnering with Lionsgate could allow it to raise the kind of capital it needs to ramp up production. Under the leadership of Harry Sloan, who was pushed out in 2009, the studio was so consumed with paying interest payments and overhead costs that it could not leverage its assets.

"The only thing that makes sense is to merge this thing with Time-Warner, which wants to pay cash, or Lionsgate, which will share exchange, so you can share the cash flow and cut overhead. You need to make James Bond and 'The Hobbit.' That’s what needs to be done, it's so obvious," Crawford said.

Sharon Waxman contributed reporting to this story.