Lions Gate sues billionaire Ichan over 'secret' plans to merge MGM

Lions Gate Entertainment Corp. sued billionaire Carl Icahn over the Metro-Goldwyn-Mayer Inc. studio deal in federal court in New York, alleging the financier was “secretly plotting” to merge the studios, reports Business Week.

In the lawsuit, Lions Gate, the studio whose films include “Crash” and “Precious,” alleges that at the same time Icahn was telling the investing public such a transaction would be a “financial debacle,” he was secretly plotting to merge the two studios.

Vancouver-based Lions Gate says Icahn, 74, the studio’s largest shareholder, did this “but only after he had acquired a sufficiently large position in both companies at depressed prices to ensure that he maximized his own profits.”

The defendants named in the suit include Icahn, his Icahn Partners LP and his son Brett Icahn. Lions Gate also seeks to rescind the purchases of all Lions Gate shares acquired by Icahn. Susan Gordon, a spokeswoman for Icahn, said he wasn’t immediately available for comment.

“Recent developments have revealed that Icahn was playing a double game,” Lions Gate said in the lawsuit, filed today in U.S. District Court in New York. “While publicly denouncing a merger with MGM as foolish and MGM itself was a dinosaur with a decaying library, Icahn was buying up MGM’s privately traded debt.”

‘Delusional’

Lions Gate alleges in the suit that in March, after the Icahn Group launched its first tender offer for all of Lions Gate’s outstanding shares, Carl Icahn began publicly attacking such a merger between Lions Gate and another studio. He also “falsely” told Lions Gate shareholders that he would block an MGM deal as “delusional.”

“Millions of Lions Gate shares were tendered into the Icahn offer on that basis,” Lions Gate said in the suit. “But it was not true. Icahn was in fact privately planning to orchestrate an MGM transaction for his own benefit.”

Lions Gate says that in June, aware that Lions Gate was in “advanced merger negations with two studios, he threatened to sue any company that entered into such a transaction with Lions Gate, including MGM.”

Securities Violations

During this period, Icahn amassed more than 10 percent of MGM’s $4 billion in debt, Lions Gate said, and also increased his stake in Lions Gate from about 19 percent in March to about 33 percent by late September.

The plaintiffs allege claims of interference by Icahn, and by engaging in this alleged misconduct, the defendants also violated of Securities and Exchange Commission rules.

MGM creditors vote tomorrow on a plan to turn management of the Los Angeles-based studio over to Spyglass Entertainment founders, a plan Icahn opposes.

In the Spyglass scenario, creditors would exchange debt for about 95 percent of the equity when MGM emerges from bankruptcy. Owners of Los Angeles-based Spyglass, the independent producer of the film “The Sixth Sense,” would get about 5 percent.

$1.6 Billion

Icahn has offered to buy MGM’s senior secured loans for 53 cents on the dollar, and has separately pledged to buy the debt for 45 cents on the dollar if creditors who hang on to their loans vote against the Spyglass plan.

Icahn said yesterday he purchased some of MGM’s loans at 50 cents on the dollar, outside of the 53-cent tender offer, which is conditioned on at least $1.6 billion in principal amount of loans being tendered.

Lions Gate is offering MGM creditors about 55 percent of the combined company and $500 million in new debt.

In its proposal, Lions Gate projects an annual overhead savings of more than $100 million a year. Cash flow would increase by about $40 million in fiscal 2011 from projections made in July. The company has said it anticipates the support of its three largest shareholders: Icahn, Mark Rachesky and Capital Group Cos.

While he supports the Vancouver-based studio’s bid for MGM, Icahn separately has conducted a hostile battle to wrest control of Lions Gate from its management since March.

November 1

His current bid of $7.50 a share for the studio, run from Santa Monica, California, expires on Nov. 1. Lions Gate fell 13 cents to $7.28 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have climbed 25 percent this year.

MGM, hobbled by more than $4 billion in debt, has told debt holders in a letter that reorganization led by Spyglass Entertainment remains the best option, according to a person with knowledge of the situation who asked not to be named because the discussions are private.

The process that led to the Spyglass proposal was run primarily by five large creditors -- Dallas-based Highland Capital Management, Anchorage Advisors, New York-based Davidson Kempner Capital Management, Solus and Goldman Sachs Group, a person with knowledge of the matter said in May.

The case is Lions Gate Entertainment Corp., v. Carl Icahn, 10-CV-8169, filed in the Southern District of New York (Manhattan).

Thanks to `Samuel 001` for the alert.

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