- Associated Press - Tuesday, October 12, 2010

NEW YORK (AP) - Lions Gate is offering to combine its business with MGM in a deal supported by billionaire investor Carl Icahn, who owns stakes in both studios.

Lions Gate Entertainment Corp. said Tuesday it has sent a proposal for a combination with financially troubled Metro-Goldwyn-Mayer Studios Inc.

Lions Gate said the combined company would be owned by its shareholders and by MGM’s creditors. These include Icahn.

Terms weren’t disclosed, though a report in the Los Angeles Times said the deal would give MGM’s lenders a 55 percent in the combined company. Lions Gate and MGM declined to comment.

Icahn said the deal is better than a current proposal to combine MGM with privately held production company Spyglass Entertainment.

Icahn has been trying to buy Lions Gate for more than a year but has been rebuffed by the boutique film studio. Icahn’s tender offer for Lions Gate worth $7.50 per share expires Oct. 22.

It is only valid if the extra shares that the company recently issued to Lions Gate director Mark Rachesky are rescinded or converted into nonvoting stock. In July, Lions Gate issued 16.2 million new common shares to Rachesky, boosting his stake to 28.9 percent, while diluting Icahn’s stake to 33.5 percent from 37.9 percent.

In its filing with the Securities and Exchange Commission, Lions Gate said it believes that Icahn, along with MHR Fund Management and Capital Research Global Investors _ its three largest shareholders _ all support the transaction. Rachesky, Icahn’s former investment adviser, controls MHR. Combined, the top three investors own 71 percent of Lions Gate, according to Capital IQ.

MHR Fund spokesman Ed Trissel and Capital Research spokesman Chuck Freadhoff declined to comment.

Lions Gate is based in Vancouver, Canada, though it operates out of Santa Monica, Calif. Its recent film releases include “The Expendables” and “The Last Exorcism.”

MGM, which has more than $4 billion in debt and has asked creditors to vote on its plan to file for bankruptcy, owns rights to the James Bond movie franchise and is planning to make a two-part movie with Time Warner Inc.’s Warner Bros., based on “The Hobbit” by J.R.R. Tolkien.

The offer from Lions Gate comes after MGM rejected a $2 billion cash offer from Indian conglomerate Sahara India Pariwar and a $1.5 billion cash offer from Time Warner.

Shares of Lions Gate fell 14 cents, or 1.9 percent, to $7.34 Tuesday.

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AP Business Writer Ryan Nakashima in Los Angeles contributed to this story.