On Eve of MGM Vote, Spyglass & Lionsgate Struggle to Manage Icahn

Analysis: Spyglass employs the carrot while Lionsgate wields the stick

Don't be fooled by the last-minute lawsuit filed by Lionsgate against its 'secretly plotting' investor, Carl Icahn.

The two are still very much working together to merge with Metro-Goldwyn-Mayer.

But Carl Icahn is simultaneously exploring his options with Spyglass Entertainment, which also wants control of MGM.

So both Lionsgate and Spyglass are working overtime to wrangle the septuagenarian investor, according to an individual with knowledge of the interactions.

One is using a carrot, the other a stick.

On the eve of a vote by MGM creditors on a prepackaged bankruptcy plan that would see Spyglass chiefs Gary Barber and Roger Birnbaum take over the leadership of the company, Lionsgate and Spyglass were busy negotiating with Icahn in an attempt to win his support for their takeover.

According to one knowledgeable individual, Icahn was demanding two out of nine seats on MGM's board of directors on Thursday, in addition to blocking rights that would allow him an additional measure of control over the company. (This sounds suspiciously similar to the demands Icahn has been making all year of Lionsgates' management.)

Meanwhile, Lionsgate is going a legal route. The studio's suit against Icahn on Thursday is meant to smoke out the investor's true intentions and prevent him from acquiring too great a share of MGM’s debt, which would impact the split of shares with Lionsgate in any merger.

Read also: Shocker on Eve of MGM Vote: Lionsgate Sues Carl Icahn Over 'Secret Plot'

Icahn currently has at least $500 million of MGM’s $4 billion debt, and possibly as much as $800 million, according to one source. That’s not enough for him to block a deal for the studio, but he’s been making a series of tender offers over the past two weeks in order to pad that number.

Following a seeming detente between Lionsgate and Icahn, Thursday’s suit left many in the industry puzzled. Had the united front Lionsgate and Icahn presented as they pushed for a merger with the Lion collapsed?

Not so.

Though a year-long proxy fight between Icahn and Lionsgate for control of the studio will always make the two sides uneasy bedfellows, Lionsgate still wants a deal with MGM to go through. But it wants it done on its terms, not Icahn’s.

But when it comes to the corporate raider, a last minute power struggle is inevitable.

Earlier Icahn had agreed to a minority position in a new MGM and Lionsgate entity. Under that scenario, Icahn would combine the 30 percent stake he has in Lionsgate with the equity position he gets from owning a large share of MGM’s debt. The breakdown of control would look something like 55-45.

Lionsgate’s fear is that Icahn will buy up enough of MGM’s debt that he will be able to demand a 60-40 split. Not only that, but a larger foothold in MGM would leave Icahn in the position of favoring the interests of MGM over those of Lionsgate in any merger that took place. To Lionsgate's way of thinking, there's no way it wants to play the ugly stepsister to cash-strapped MGM.

Meanwhile Spyglass is bending over itself to appease the mercurial billionaire. In some respects, Spyglass is at a disadvantage in winning over Icahn. The investor has no ownership position in the production company, but he does own stakes in both Lionsgate and MGM.

To compensate, Spyglass executives spent part of Thursday on a conference call with Icahn. They balked at his demands for blocking rights, wary of granting him control. But they have not ruled out some kind of scenario that brings in Lionsgate – after the studio has emerged from bankruptcy.

“They’re going to think they have a deal and he’ll retrade them to death,” one insider warned.

With all this last minute manuvering — it is possible that Friday's planned vote on the Spyglass plan will be postponed.

Look for the courtship of Carl Icahn to continue apace.