Why Carl Icahn Wants to Merge Lionsgate With MGM

Just when it looked like MGM's drawn-out saga was nearing an end — a pre-packaged bankruptcy with Spyglass Entertainment's chiefs in charge — here comes a third act twist. Lionsgate already bid $1.4 billion for MGM earlier this year, a bid that was rejected as too low. Now Lionsgate has a new offer on the table: Combing Lionsgate and MGM, giving MGM lenders 55 percent of the new company. And shockingly, Carl Icahn, who controls about a third of Lionsgate's stock and has been suing for control of the company, supports the plan.

Industry insiders tell me this merger may give the studio a bigger chance at success than the prior plan. MGM's lenders were planning to exchange $4 billion debt for over 95% of a new company, run by Spyglass execs Gary Barber and Roger Birnbaum. Now the decision is in the hands of MGM's 100 plus lenders. Do they want to keep MGM small or do they want to merge with the largest independent studio? A couple of the Hollywood folks I've chatted with today note that Lionsgate has plenty of experience managing libraries, and they could be well equipped to mine MGM's for new movie ideas.

Icahn and Lionsgate have been embroiled in a multi-million dollar lawsuit over control of the company. But now we're looking at a remarkable and unexpected detente, just 10 days before Icahn's offer to buy all outstanding shares of Lionsgate for $7.50 a share expires on Oct 22. This is a total about-face from Icahn's former position — with public vitriol, he criticized Lionsgate proposal to purchase MGM. Icahn has slowly been buying up MGM's debt, and sitting on both ends of a deal, it seems this merger is an entirely different situation. Today he issued a statement saying "We believe this proposal as submitted is far better for MGM holders than the current proposal."

What about Time Warner , which offered $1.5 million to buy MGM? MGM has not gone back to Time Warner to ask them to 'up' their bid. And Time Warner has no interest in bidding against itself.

So now it's up to MGM's army of debt holders to decide whether MGM's lion should team up with the other lion, or whether they should go it alone. Lionsgate's stock is up 26 percent in the past 12 months, but its shares dropped 14 cents today.

Questions? Comments? MediaMoney@cnbc.com