LIONS Gate Entertainment Corp has proposed merging with Metro-Goldwyn-Mayer in a deal valuing one of Hollywood's oldest movie studios at up to US$1.8 billion, a source familiar with Lions Gate's strategy said yesterday.

The proposed deal by Lions Gate for the troubled studio - home to the "James Bond" films - won the backing of corporate raider Carl Icahn, an investor in both studios, who once compared a merger to a cash-strapped couple who decide to buy an "overpriced" mansion.

The Lions Gate offer would turn over about 20 percent to 25 percent of the combined company to Icahn, the source said. In a filing, Lions Gate said the combined company would be owned by its shareholders and MGM's creditors.

"We believe this proposal as submitted is far better for MGM holders than the current proposal to combine MGM with Spyglass," Icahn said.

A second source said Icahn, who is intent on sealing a deal, had already courted and opened discussions with several of MGM's creditors, and is angling to secure two seats on the board if a deal goes through.

The overture by Lions Gate, which produces the hit TV series "Mad Men," is the latest chapter in MGM's years-long saga to survive as it struggles with some US$4 billion in debt. It had already spurned earlier offers from Lions Gate, Time Warner Inc and others.

Ahead of Lions Gate's actions, MGM had intended to move ahead with a prepackaged bankruptcy plan under which Spyglass Entertainment would contribute certain assets in return for a roughly 5 percent stake in the reorganized MGM.

The nonbinding aspect of the agreement with Spyglass was a signal to potential bidders to "get your act together now," said a source.