UPDATE 2-Lions Gate will not raise bid for MGM -- sources
* Lions Gate not planning to raise MGM bid
* Decision reflects Lions Gate withdrawal from auction
* Decision leaves Time Warner, Access in auction
(Adds sources say bids disappointing, shareholder)
NEW YORK/LOS ANGELES, March 25 (Reuters) - Lions Gate Entertainment Corp (LGF.N) has decided it will not increase its offer for Metro-Goldwyn-Mayer, after being told it was outbid by Time Warner Inc (TWX.N), two sources familiar with the matter told Reuters on Thursday.
Lions Gate and billionaire Len Blavatnik's industrial holding company Access Industries had put in second-round bids ranging from $1.2 billion to $1.4 billion for the famed studio, but Time Warner outdid them with a $1.5 billion bid, Reuters reported on Monday.
Time Warner has been seen as the most likely buyer for MGM, home to the Pink Panther and James Bond franchises.
But even Time Warner's bid might run into obstacles, given that all the offers have been lower than creditors hoped.
Sources said MGM and its creditors are also considering a prepackaged bankruptcy without a sale.
Lions Gate's decision to retreat on MGM comes after billionaire investor Carl Icahn offered to buy Lions Gate, maker of the "Saw" films, in a move designed to hinder the studio's bid for MGM. Icahn owns about a 19 percent stake in Lions Gate.
"It's not surprising that they have pulled out of the bidding. Lions Gate did not have the financial firepower to be competitive in this deal against the likes of Time Warner," said Richard Dorfman, managing director for Richard Alan Inc, a media investment firm with a stake in Lions Gate.
MGM and Lions Gate, home to the "Saw" films, declined comment.
The Lions Gate board has rejected Icahn's offer as 'woefully inadequate."
Icahn has said Lions Gate should focus on consolidating film and TV distribution rather than buying film libraries.
MGM, struggling with $3.7 billion of debt, said in November it was exploring a potential sale of the company. As the auction progressed and buyer interest dwindled, sources told Reuters MGM was considering a prepackaged bankruptcy.
A committee of MGM's creditors met on Tuesday and is holding discussions with the broader lending community this week.
The studio, which enlisted turnaround specialist Stephen Cooper last year to help it restructure, got saddled with the debt from a 2005 buyout and also has a $250 million revolving credit facility maturing in April.
MGM, which is home to more than 4,000 film titles, received a lot of initial interest from rival media companies and buyout shops, but not all of it has translated into actual offers.
MGM's library also includes a piece of the two "Hobbit" films to be produced by "Lord of the Rings" director Peter Jackson. But it has been struggling to create new hits and is also trying to cope with plunging DVD sales caused by consumers moving online.
MGM's debt stems mainly from its buyout in 2005 by a group, including four private equity firms -- Providence Equity Partners, TPG [TPG.UL], Quadrangle Group and DLJ Merchant Banking Partners, a unit of Credit Suisse -- and media companies Sony Corp (6758.T) and Comcast Corp (CMCSA.O). (Reporting by Jui Chakravorty in New York and Sue Zeidler in Los Angeles; editing by Tim Dobbyn and Andre Grenon)