Icahn Breaks Talks With Lionsgate

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Talks between Lionsgate Entertainment and activist investor Carl Icahn broke down Wednesday night, leading some in the investment community to speculate that the one-time corporate raider may launch a proxy fight for control of the movie studio which produces such cable staples as Mad Men and Weeds.
"We are always open to hearing the ideas of our shareholders and exploring ways to incorporate them," Lionsgate co-chairman and CEO Jon Feltheimer and vice chairman Michael Burns said in a joint statement. "Over the past three weeks, our board of directors has been in discussions with Mr. Icahn to consider how we could accommodate some of his requests, including the possible appointment of his designees to the board of directors. However, the board ultimately concluded that it could not meet his requests and continue to serve the best interests of all of our shareholders, which is our number one priority."
In a statement, Icahn said that talks broke down because of a disagreement "concerning certain aspects of the standstill agreement that Lionsgate demanded as a condition to installing those board members."
That standstill is likely part of Lionsgate's $340 million credit facility which prohibits a single investor from owning more than 20% of the studio's stock. Icahn has been steadily increasing his Lionsgate holdings over the past few months - he now controls about 14.3% or 16.5 million Lionsgate shares.
To launch any takeover attempt of the company - if that is what the former raider intends - Icahn would need allies. And so far, he has at least one.
Former Icahn protégé Mark Rachesky, who controls his own investment fund MHR Capital Partner, has also been building a position in the studio. According to documents filed with the Securities and Exchange Commission March 9, Rachesky boosted his Lionsgate stake to 19.7% (22.8 million shares) from 17% in October.
In the meantime, Lionsgate shares have fallen about 28% between October and March - they closed at $4.96 each on March 11.
Icahn and Rachesky combined would have about 34% of Lionsgate shares, short of a simple majority. A total revamp of the board would likely require a two-thirds majority, according to SEC documents. But even that could be achieved fairly simply - Icahn and Rachesky would only need to sway four other major shareholders - Capital Research Global Investors (9.5%); Kornitzer Capital Management (9.3%); and Steinberg Asset Management (14.6%).
This stock has a very concentrated holder base," said Miller Tabak media analyst David Joyce.
Icahn's intentions are unclear, but the activist investor most recently has been a big fan of share buybacks - he nudged Time Warner Inc. to accelerate and increase its share repurchase program,when he launched a much louder proxy fight for that company in 2005.
Joyce said Icahn's intentions could include increasing the buyback to an outright sale of the company.
"Those are possibilities, but they'll have to be patient," Joyce said, adding that Icahn and Rachesky have been steadily increasing their stakes in the studio since its fiscal third quarter earnings call. On that call, which Joyce characterized as "disastrous," Lionsgate revealed that it had no financing partner for fiscal 2009's slate of movies, which could lead to the studio reporting negative free cash flow this fiscal year.
Lionsgate shares dipped to a 52-week low on Feb. 10 - the same day it released fiscal third quarter results - of $3.65 per share.
"The bright side is that [Lionsgate] reiterated EBITDA guidance of $50 million before the TV Guide Network acquisition for fiscal 2010," Joyce said.

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