LOS ANGELES/NEW YORK (Reuters) - Lions Gate Entertainment Corp has proposed merging with Metro-Goldwyn-Mayer in a deal valuing one of Hollywood's oldest movie studios at $1.6 billion to $1.8 billion, a source familiar with Lions Gate's strategy said.
The proposed deal by Lions Gate for the troubled studio and home to the "James Bond" films won the backing of corporate raider Carl Icahn, an investor in both studios, who once compared a merger to a cash-strapped couple who decide to buy an "overpriced" mansion.
The Lions Gate offer would turn over about 20 percent to 25 percent of the combined company to Icahn, the source said. In a filing, Lions Gate said the combined company would be owned by its shareholders and MGM's creditors.
"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.
A second source familiar with the situation told Reuters that Icahn, who is intent on sealing a deal, had already courted and opened discussions with several of MGM's creditors, and is angling to secure two seats on the board if a deal goes through.
The overture by Lions Gate, which produces the hit TV series "Mad Men," is the latest chapter in MGM's years-long saga to survive as it struggled with some $4 billion in debt. It has spurned earlier offers from Lions Gate, Time Warner Inc and others.
On Tuesday, MGM lawyers and bankers involved in the bankruptcy process were expected to have met to discuss the Lions Gate plan, adding it was unclear whether the proposal was superior to the nonbinding Spyglass deal, another source said.
Ahead of Lions Gate's actions, MGM had intended to move ahead with a prepackaged bankruptcy plan under which Spyglass Entertainment would contribute certain assets in return for a roughly 5 percent stake in the reorganized MGM, a person familiar with the discussions said.
But people familiar with the situation questioned whether MGM's woes would be resolved any time soon. These people noted that even a revised bid by Time Warner Inc, which has offered $1.5 billion for the studio, remained a possibility.
Time Warner declined comment.
The nonbinding aspect of the agreement with Spyglass was a signal to potential bidders to "get your act together now," said one source familiar with the situation.
For their part, Lions Gate analysts and shareholders liked the idea, believing there was upside potential through revenue gains and library cost synergies.
"It seems, if I were an MGM creditor, this would work better than the Spyglass deal. You wind up with a much larger entity, more liquidity, more heft and all the benefits that come with the scale they'd achieve," said Richard Dorfman, managing director of investment firm Richard Alan Inc, which owns shares in Lions Gate.
Lions Gate has been hurt by the decline in DVD sales, video piracy and a slowdown in consumer spending that has plagued much of Hollywood. It also lacks the scale of the major studios, such as Walt Disney Co or Warner Bros.
What is more, Lions Gate management has been trying to fend off Icahn, who has made a tender offer for all outstanding shares and has promised a proxy fight.
The MGM bankruptcy plan calls for Spyglass Entertainment founders Gary Barber and Roger Birnbaum to take over the management of the studio once it emerges from Chapter 11.
Icahn's comments came on the same day his lawyers squared off in court against Lions Gate, which he is suing over another deal to sell some of its debt to an investment fund controlled by director and shareholder Mark Rachesky.
The case, which is taking place in Vancouver, is expected to last several days. Icahn's lead attorney Mark Gelowitz, said he would prove that Lions Gate's actions were a "shocking example of the abuse of corporate power."
He said the MGM proposal would not have an impact on his lawsuit against Lions Gate.
"We intend to continue to pursue our lawsuits regarding Lions Gate's recent dilutive transaction with Mark Rachesky," said Icahn, who has been stepping up his deal-making in entertainment.
He holds about a third of the senior debt of video chain Blockbuster Inc.
The proposal to combine Lions Gate and MGM was first reported by the Los Angeles Times, which said terms called for MGM lenders to control 55 percent of the merged company, versus 95 percent they would own under the deal with Spyglass.
Lions Gate shares were down about 8 cents at $7.40 in New York Stock Exchange trading.
Additional reporting by Tom Hals in Wilmington, Delaware, Nicole Mordant in Vancouver, Sayantani Ghosh and Sakthi Prasad in Bangalore; editing by Maureen Bavdek, Kenneth Li and Andre Grenon