NEW YORK/LOS ANGELES (Reuters) - Billionaire investor Carl Icahn stepped up his fight for control of film studio Metro-Goldwyn-Mayer Inc on Thursday, offering to buy senior debt from creditors willing to vote down the company’s proposed deal with Spyglass Entertainment.
MGM, home to the James Bond and Pink Panther films, has struggled with heavy debt after a leveraged buyout of the studio in 2005. It has labored to find a plan to fix its finances and settled earlier this month on a proposal that would include filing for bankruptcy to shed more than $4 billion in debt and then teaming up with production company Spyglass.
Icahn, who says he has a “significant” position in MGM, is pushing an alternative proposal to merge the heavily indebted film studio with Lions Gate Entertainment Corp, in which he also has a large stake.
Icahn may be trying to tap into dissent among the creditors about which is the better path for MGM.
“While the main creditor group supports the Spyglass deal, there is likely more than half who are not part of this group, notably Carl Icahn with around 13 percent of MGM’s debt,” said Stifel Nicolaus analyst Ben Mogil.
Mogil said he finds the Lions Gate deal more attractive. “We find the appeal of the Spyglass deal to the creditors surprising,” he said.
Icahn has said that the deal joining MGM with Lions Gate, known for television hit “Mad Men,” would increase values for MGM and Lions Gate stakeholders. He describes the Spyglass plan as a “recipe for disaster” that is being pushed through too quickly without enough disclosure.
Lions Gate’s proposal to merge with MGM values the company -- one of Hollywood’s oldest movie studios -- at $1.6 billion to $1.8 billion, a source familiar with Lions Gate’s strategy has said.
Icahn also said that he knew of another offer for MGM that neither the company nor its creditors has made public.
An MGM spokeswoman declined to comment.
Mogil said the Lions Gate offer could generate at least $375 million in cash earnings. The Spyglass plan, on the other hand, would require additional financing of $500 million to jump-start production, he said.
Spyglass, which has financed films such as “The Sixth Sense,” would contribute some assets to MGM and take over managing it in return for a small equity stake. MGM’s senior lenders would end up owning most of the company.
Spyglass might also be the key to a potentially lucrative MGM deal with Time Warner Inc’s Warner Bros. Pictures and director Peter Jackson to film two movies based on J.R.R. Tolkien’s novel “The Hobbit,” said one person familiar with the movie deal.
“Nobody but the Spyglass team could structure the Hobbit deal with Warner and Peter Jackson to make it work on this time frame. If the Spyglass deal doesn’t get done, ‘The Hobbit’ will languish,” the person said.
Spyglass heads Gary Barber and Roger Birnbaum -- who are slated to run the new company -- actively negotiated the deal and Spyglass brought Warner and Jackson to the table, he said.
A prepackaged bankruptcy plan involving Spyglass needs the OK from more than 50 percent of the 160 debtholders as well as holders of two-thirds of the face amount of the debt to go forward.
But two sources familiar with the situation said that there was growing anger among smaller creditors.
Several debtholders including Franklin Templeton Investments are angry with a small group of powerful hedge funds including Anchorage Advisors and Highland Capital Management, who control about $800 million in MGM debt and have thrown their support behind the Spyglass deal, according to one of the sources familiar with the situation.
Franklin, Highland and Anchorage Advisors declined to comment.
Icahn said his offer would be good for holders of MGM’s senior secured loans because it would offer the option to sell their loans to him at 45 cents on the dollar, about where they were quoted on Wednesday, according to Reuters data.
He said the options would give noteholders the right to lock in the 45 cent price because they could sell the loans from October 29 up until two weeks after MGM exited bankruptcy, or one year, whichever came first. He said he would buy loans worth up to $963 million in principal amount.
In return, debtholders would promise to vote against the company’s proposed plan. Senior debtholders are due to vote by October 29 on the prepackaged bankruptcy deal, which would enable the company to get through bankruptcy more quickly. MGM delayed the vote from October 22.
Icahn said his offer is contingent on the Spyglass plan being rejected.
Additional reporting by Tom Hals; editing by Gerald E. McCormick, Dave Zimmerman, Phil Berlowitz