Stephen Foley: Why Icahn's plot for MGM merger should be rejected by other investors
Saturday 02 October 2010
US Outlook: There are many terrible reasons why two companies might embark on a merger. Doing it because the same corporate raider pops up on the investor register at both companies must be among the worst.
Carl Icahn wants to smoosh together Lions Gate Entertainment, producer of the Mad Men television series and the movie Precious, where he is a 33 per cent-shareholder, and MGM, the near-bankrupt film studio behind the James Bond franchise, where he has snapped up 10 per cent of the senior debt.
With a vast film library that stretches back to Gone With The Wind, MGM should never have found itself in a financial disaster zone, but it got leveraged to the hilt and beyond in a boom-time buy-out by private equity. The battle for its future has turned into a Hollywood epic more complicated than the plot of Inception. The company's creditors have turned away a series of low-ball offers from other studios – including Lions Gate itself, earlier this year – and instead expect to turn the debts into equity in a restructured company.
While the wrangling goes on, the next James Bond movie is on ice, neither shaken nor stirred.
The current plan has been cooked up between the creditors and Spyglass Entertainment, maker of The Sixth Sense, which will hand over some of its back catalogue in return for a slice of the equity in a restructured MGM. It's a last-resort plan, but at least it leaves most of the upside with the creditors, should MGM be restored to a semblance of former glory.
Lions Gate, a much newer kid on the block, is carving a reputation for movies and TV shows that break the mould, and bring an art-house sensibility. You can see why it wants to get its hands on MGM. The pair are joint venture partners (with Paramount Pictures) in a new premium cable channel called Epix, and there would be synergies in managing the library of old films. The bottom-line reason, though, is that, down on its uppers, MGM is a steal.
Mr Icahn has been trying to take over Lions Gate himself, and was belligerently opposed to the talks to buy MGM – until he wasn't. His role reversal takes us down to the next, even more complicated plot level. By buying an estimated $450m of MGM debt, he has inserted himself into the talks at a very late stage, and is confounding all the participants in the restructuring.
It seems likely that the most lucrative path for MGM bondholders would be to go for the relatively straightforward Spyglass deal now, convert the debt into equity and then run a clean, quick sale of the company next year. It was the very complexity of MGM's finances that put off many bidders, or led them to put low offers on the table. With Bollywood interests among those sniffing around, a post-Chapter 11 auction could be well supported. Maybe Lions Gate will prevail then, but it will only be if it pays a fair price.
The fact that Carl Icahn is playing both sides in the latest talks, as both buyer and seller, should only make the other participants sceptical about his proposals.
Diving in at the deep end is no excuse for shirking the style stakes
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