towne32 is completely right. MKVToolNix isn’t capable of re-encoding video. The space savings is only because M2TS has more padding.
That said, it sounds like you have a raw M2TS file from a Blu-Ray. Why wouldn’t you use tsMuxerGUI to build it as a proper Blu-ray disc.
You’d have superior compatibility.
Edit: Oh, you don’t have a BD burner. You could use BD Rebuilder to re-encode it down to a BD9 (AVCHD) and burn it to a dual layer DVD.