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UPDATE: Image, BTP Merger Derailed

25 Jan, 2008 By: Erik Gruenwedel

Image Entertainment's protracted merger with BTP Acquisition Company LLC appears to have veered off a cliff, with both sides accusing the other of breaching the agreement.

BTP, which is headed by film financier David Bergstein, Jan. 23 issued a default notice to Image claiming the Chatsworth, Calif.-based DVD distributor had failed to satisfy various closing conditions, including obtaining approval from its current lender to help facilitate $60 million in cash toward the transaction.

Image, in turn, filed a notice of anticipatory breach claiming BTP does not intend to complete the $130 million merger.

The transaction was slated to close Feb. 1.

News of the impasse sent Image shares freefalling almost 70% to $1.14 per share in midday trading Jan. 28.

Santa Monica, Calif.-based BTP seeks a return of $3 million deposited in an escrow as a condition of it extending the merger closure four times since the deal was first announced last March.

“Yes, [the deal] is in jeopardy,” confirmed Image COO David Borshell.

Image Jan. 24 filed a motion against CT1 Holdings LLC — which was denied Jan. 25 by a Los Angeles Superior Court judge — alleging that a multiyear feature film DVD and electronic distribution deal was being used as leverage by BTP against the merger.

CT1 is parent company of ThinkFilm and Capitol Films and headed by Bergstein.

“[BTP] are claiming rights to the [CT1] output distribution agreement, and we are going to court to protect our rights,” Borshell said. “We believe they are claiming that because they cannot complete the merger itself.”

He said if BTP can't close the deal a special committee created to handle the merger would decide what action the Image board would take.

Image CEO Martin Greenwald Jan. 28 sent a letter to Bergstein rejecting all default claims, calling for a meeting with CT1 and continuation of the output deal while all disagreements are dealt with in arbitration.“It is not a surprise that things are coming to a head,” Borshell said. “At some point something had to give. Either they close, or they won't. Then it becomes a blame game.”

The deal came under question late last year when BTP said it would consider acquiring shares of Image more cheaply on the open market rather than pay the merger cash share price of $4.68.

At that time, Image shares traded slightly above $3.50 per share.

Earlier this month, however, BTP deposited another $1 million in escrow to $3 million allaying fears, until now, that the deal was in trouble.

Bergstein reiterated that BTP had been in compliance with all provisions throughout the merger talks. He said the output deal between CT1 and Image had undergone multiple revisions, including a written memorandum of terms Bergstein said Image's Greenwald confirmed Jan. 21.Terms included an initial $1 million cash payment from Image for product from CT1.On Jan. 22, Bergstein said Image disavowed the terms and refused to return CT1 product.“I have enjoyed a close and cordial relationship with … Image, and it is unfortunate to witness the meltdown of these two large transactions — the merger and distribution relationship — by boardroom fiat, to the detriment of [Greenwald] and his team,” Bergstein said in a statement.

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