The Cabin in the Woods

Metro-Goldwyn-Mayer files for bankruptcy after creditors strike deal with Carl Icahn

Metro-Goldwyn-Mayer, Hollywood’s fabled and once most powerful studio, has filed for bankruptcy protection after it could no longer pay down its crippling debt or make and release new movies.

The filing, made Wednesday morning, comes after MGM’s leading creditors struck a deal with corporate raider Carl Icahn, who had amassed about 15% of the company’s debt and was previously pushing for a merger between MGM and Lions Gate.

Instead, Icahn agreed to support a plan under which the chief executives of film production and finance company Spyglass Entertainment will run MGM once it exits Chapter 11, which could occur in as soon as one month.

Under the pre-packaged bankruptcy plan, MGM’s $4 billion worth of debt, upon which it could no longer afford to pay interest, will be converted into more than 99% of the equity in the studio, which is valued at $1.9 billion. Spyglass principals Gary Barber and Roger Birnbaum will become co-chief executives and co-chairmen, running a slimmed-down MGM with significantly less overhead and start producing new movies, including a James Bond sequel and two films based on "The Hobbit" that will be co-financed with Warner Bros.

Under an agreement reached Tuesday night, Icahn has agreed to change his "no" vote on the Spyglass plan cast last Friday to a "yes" and also to not challenge the plan in bankruptcy court — a possibility that some people close to MGM had feared could delay the reorganization process.

In exchange, the company’s leading creditors agreed to make certain changes to the plan. Most notably, 15 titles from Spyglass’ library will no longer be merged into MGM in exchange for a 5% stake in the studio once it exits bankruptcy. Spyglass’ co-chief executives Barber and Birnbaum will instead get a very small stake of just 0.5%, said by people familiar with the deal, in exchange for bringing certain projects to MGM that they had in development at their company.

Icahn had opposed the merger with the Spyglass library titles, which included "The Sixth Sense" and "Seabiscuit," because he believed it overvalued the films.

In addition, Icahn will be allowed to appoint one person to MGM’s nine-person board of directors. A likely possibility is his son Brett, who has played a key role in his father’s dealings with the studio and with Lions Gate. Barber and Birnbaum will also get seats on the board.

Upon exiting bankruptcy, the creditors have also agreed to negotiate in good faith with Lions Gate about a potential merger. However, the talks will not be exclusive, meaning other parties can propose a merger or acquisition as well. The creditors previously rejected a proposal by Lions Gate that would give them 55% of the equity in a combined studio.

It has taken MGM creditors more than a year to agree on a reorganization plan that would see the 86-year-old studio remain as a stand-alone operation. They also solicited acquisition offers but none, including a $1.5 billion bid by Time Warner Inc., satisfied the creditors.

Once MGM exits bankruptcy, Barber and Birnbaum will face formidable challenges in rebuilding MGM, which has lost much of its luster since it was acquired by a consortium of investors including Sony Corp. in 2004 for nearly $5 billion. The studio’s primary asset, its library of about 4,000 titles, now generates significantly less cash flow due to the fading DVD market.

In addition, the company’s financial woes have meant it was barely able to produce or distribute any films for the past year under motion picture Chairwoman Mary Parent, who recently exited. Its only release in the past year was the comedy "Hot Tub Time Machine," which was a box-office disappointment. MGM has two unreleased films in the wings: A remake of the Cold War thriller "Red Dawn" and the horror thriller "The Cabin in the Woods." Another movie, the comedy "Zookeeper" starring Kevin James, will be released by Sony Pictures next summer.

Barber and Birnbaum will be looking to raise $500 million once MGM exits bankruptcy in order to fund operations and the production of new films and television shows.