News

Icahn’s at the Studio Gate

10/24/2008 8:00 PM Eastern

Activist investor Carl Icahn is taking a renewed interest in Lionsgate Entertainment, the Hollywood studio responsible for such popular cable fare as Mad Men, nearly tripling his stake in the company to 10.8 million shares last week.

Icahn, in a filing with the Securities and Exchange Commission Oct. 20, said that his companies increased the stake in Lionsgate because it believes that the shares are undervalued. He added in the filing that representatives of his companies have had discussions with Lionsgate CEO Jon Feltheimer and vice chairman Michael Burns and expect to continue to have talks in the future.

“He [Icahn] has a good open constructive dialogue with Lionsgate senior management,” Lionsgate spokesman Peter Wilkes said in an interview. “He’s been involved in our stock over the long term and we welcome his input and we welcome his investment as we welcome the investment of all of our shareholders. He certainly has shown over the years a superb grasp of recognizing undervalued assets and we look forward to our continued dialogue.”

Icahn did not return a call for comment.

Icahn is known for swooping down on companies that have hit rough patches and lobbying for changes. Three years ago, he began gobbling up Time Warner Inc. stock in huge chunks — with other investors, he eventually controlled about 3.28% of the outstanding total — and pushed for a breakup. Icahn relented after Time Warner agreed to boost a share repurchase program to $20 billion from $12.5 billion, shave overhead costs and appoint two new independent directors.

While no one is suggesting that Icahn is looking at Lionsgate with the same jaundiced eye, it seems as if he has a little more clout with Lionsgate than he had with Time Warner.

SOURCE: SEC documents
MHR Capital Partners 17.4 million 14.8%
Steinberg Asset Management 14.8 million 12.4%
Kornitzer Capital Management 12.5 million 9.9%
Carl Icahn 10.8 million 9.2%
Capital Research Global Investors 11.0 million 9.2%

As Icahn has been beefing up his stake, so has former protégé Mark Rachesky, who heads up MHR Capital Partners. Rachesky, who owns 14.8% of Lionsgate stock, bought an additional 221,000 shares of Lionsgate in October bringing his total holdings to about 17.4 million shares. Together the two control 24% of the studio’s equity.

Icahn has had a stake in Lionsgate for about three years. When he first bought into it in 2006, speculation was that he would team up with Rachesky, an investor since 2003, to take over the studio. While that speculation never came to fruition, this time could be different.

For starters, Rachesky has a larger stake in Lionsgate this time — 14.8% as opposed to 10% in 2006. And now the stock market is in utter turmoil, which could make investors more open to a deal being done.

Some disagree that Icahn sees blood in the water at Lionsgate. According to one member of the media community who asked not to be named, the fact that Icahn has held onto the stock so long is an indication that he sees it as more of a passive investment.

“If you look at most of his investments, when he’s going to be an activist shareholder, he usually signals his intent fairly early,” the executive said. “That has not been the nature of their dialogue so far.”

Lionsgate shares have been hit hard in the past year, with the rest of the market. The stock is down 21.7% ($2.02) this year, but was hit even harder when Burns was forced to sell nearly half his stake in the company to settle margin calls.

In a securities filing on Oct. 14, Lionsgate said Burns sold about 672,000 shares on Oct. 10 — nearly half of the 1.36 million shares he held the day before — to settle a margin call from Merrill Lynch.

That forced sale drove down Lionsgate’s share price even further — to about $5.59 at one point — and presented an opportunity for Icahn and anyone else with some spare cash to snap them up. According to Icahn’s Oct. 20 SEC filing, his companies bought about 450,000 Lionsgate shares on Oct. 10. The stock has ticked up — partially on takeover speculation — to $7.20 on Oct. 22.

Miller Tabak media analyst David Joyce said, while he sees no signs of an imminent takeover, Lionsgate could be a ripe target for a movie studio or cable programmer.

Possible suitors could be Viacom — which controls rival movie studio Paramount Pictures and already is teaming up with Lionsgate for an as-yet-unnamed premium cable channel — and Time Warner, the home of Warner Bros.

Lionsgate has strong ties to cable. In addition to Mad Men, it co-produces Weeds for Showtime Networks, Crash for Starz Entertainment and, through subsidiary Debmar-Mercury, distributes Tyler Perry’s House of Payne on TBS. The studio also is a partner with Comcast in the on-demand horror programmer FearNet.

Joyce said that Lionsgate has been on a roll lately — it reported a net profit of $7.1 million in the fiscal 2009 first quarter ended June 30, compared to a loss of $53 million in the like period in fiscal 2008. Free cash flow generation also is strong: He estimated that free cash flow would be $110 million this fiscal year and will continue to grow.

The free cash could be used for share buybacks, a favored Icahn tactic. “Also it has been a perennial takeover target,” Joyce said, “which is also his [Icahn’s] modus operandi.”

While Lionsgate is performing well, its best asset could be its film library, which currently has about 12,000 movie and television titles.

Joyce pointed to billionaire financier George Soros’s purchase of the DreamWorks film library (with just 59 films) in 2006 for about $900 million.

“There’s clearly a desire to have predictable cash flows that you could then lever up,” Joyce said.

September