Bankruptcy pushes MGM toward Spyglass deal

Bankruptcy: MGM favors a plan calling for Spyglass Entertainment chiefs Gary Barber and Roger Birnbaum to take over a significantly slimmed down MGM following a prepackaged bankruptcy.

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MGM has said that a proposed merger with Lions Gate lacks a tremendous amount of due diligence and data to support its claims of savings and cash flow.

Hollywood studio Metro-Goldwyn-Mayer Inc told creditors that claims of synergies and cost savings outlined in a merger proposal by Lions Gate Entertainment Corp lacked proof, a source familiar with the matter told Reuters.

MGM sent a memo to creditors on Monday arguing against the merger just days before debtholders will vote on a rival proposal to handle the storied studio's estimated $4 billion in debt, said the source, who had seen the memo.

It favors a plan calling for Spyglass Entertainment chiefs Gary Barber and Roger Birnbaum to take over a significantly slimmed down MGM following a prepackaged bankruptcy, the source said on condition of anonymity because the memo had not been made public.

The memo was sent to lenders on the same day Lions Gate, which produces the popular "Mad Men" series, argued in a letter to MGM that a combination of the two, which has the backing of billionaire Carl Icahn, would generate $68 million more in cost savings and $120 million more in cash flow over five years than previously been estimated.

Its plan calls for the elimination of 174 jobs, cutting the total number of employees at the two companies by about 17 percent to 835. Lions Gate said the merger would save over $100 million in costs annually, including its latest projections.

The MGM memo said the Lions Gate proposal lacks a tremendous amount of due diligence and data to support its claims of savings and cash flow. The source told Reuters many of the Lions Gate proposal's assumptions and governance issues would require months to evaluate and validate.

Sources have also said a group of powerful hedge funds including Anchorage Advisors and Highland Capital, who control about $800 million of MGM debt, are supporting the Spyglass deal on views the Lions Gate deal lacks clarity, would take longer than the Spyglass deal and could possibly derail a long-sought production deal with Time Warner Inc to produce two films based on "The Hobbit."

Highland declined comment and Anchorage was unavailable.

Senior debtholders are due to vote by October 29 on the Spyglass plan, under which Spyglass would contribute certain assets in return for an equity stake of roughly 5 percent.

MGM, home to James Bond and Pink Panther films, declined comment.

Icahn -- who has large positions in both studios -- meanwhile stepped up his efforts by offering last week to buy up to $963 million in senior debt from MGM creditors willing to vote down the Spyglass proposal.

Some analysts, like Ben Mogil of Stifel Nicolaus, have expressed surprise the main creditor group appears to be supporting the Spyglass deal, noting that Lions Gate could generate at least $375 million in cash earnings, while the Spyglass plan would require additional financing of $500 million to jump-start production.

IT'S NOT OVER UNTIL IT'S OVER

And some bankruptcy experts believe the battle will be far from over even if the Spyglass deal gets voted through. Icahn could challenge the Spyglass deal were it to go to bankruptcy court, they said.

"Icahn can challenge the Spyglass deal in bankruptcy court along with the other secured creditors if he can show that the Spyglass deal will impair their rights as secured creditors," said bankruptcy attorney Stefan Coleman.

In a letter filed with the Securities and Exchange Commission, Lions Gate said its proposal would allow creditors to recover all of their investment through a combination of 55 percent equity in the combined company and $500 million in cash or recovered debt.

Icahn, who owns more than 30 percent of Lions Gate, also has a tender offer out to buy that studio's outstanding shares for $7.50 a piece.

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