The Carl Icahn / Lions Gate Melodrama: Who's Right?

Includes: LGF.A, TIN
by: Top Textrader

Lions Gate Entertainment (LGF) (5.77) has built its Hollywood moviemaking reputation on drama and thrills. However, the recent boardroom battle unfolding between the aspiring media conglomerate and corporate titan Carl Icahn is producing drama that LGF and some of its investors would love to avoid.

This past month, Mr. Icahn, the second largest shareholder in LGF with 19% of its shares, made overtures to buy an additional 10% in the company at $6. The initial reaction was positive for stockholders as the stock shot from $5 to $6.

In reaction to this proposal, LGF management and its board adopted the poison pill measure to defend the company from Mr. Icahn. With an impasse at hand, both sides are claiming they know what is best for the future of the company and its value for shareholders.

What has touched off this latest corporate showdown is LGF’s pursuit of a possible buyout of MGM Studios, or at least a healthy portion of its movie library. The company is also focused on MIRAMAX Studios in the event that a deal with MGM Studios does not transpire.

Management is aware of the negativism surrounding a large acquisition and addressed it during its recent quarterly earnings conference call, pointing out that regardless of any deal, the company would be certain that it would be accretive immediately to LGF’s bottom line. Management believes this type of acquisition fits nicely into its transformation into a media conglomerate.

Mr. Icahn sees it differently. He believes the company, which according to its last 10-Q is already leveraged with more than $800 million in debt, should not be doing an acquisition of this size and nature. He claims both studio libraries are seeing their values decline and neither are worth the premiums being asked.

Mr. Icahn has been an investor in LGF for some time, so his intentions may be aligned with common shareholders.

Speaking of insider ownership --- as of December 31, 2009, four shareholders, Mark H. Rachesky, M.D., Carl C. Icahn, Capital Research Global Investors and Kornitzer Capital Management, Inc. and their respective affiliates, beneficially owned 19.7%, 17.7%, 14.7% and 10.4%, respectively, of LGF’s outstanding common shares. Icahn added 945,139 more shares in February bringing his stake to nearly 19%. Four large investors own more than 62% of the common shares, which also make this situation quite intriguing.

Kornitzer Capital Mgt. President, John Kornitzer, has gone on the record telling Icahn to either buy the whole company at a much higher price or allow management to do its job. He had better be careful what he wishes for. If Mr. Icahn starts dumping his stock, LGF may become much cheaper. A 19% stake being dumped would inflict some serious short-term damage on the stock.

As an owner of LGF shares, I must admit my feelings are mixed on the showdown emerging between LGF management and Mr. Icahn.

Mr. Icahn makes some valid points. A company as leveraged in debt as LGF should only be considering investments with high growth potential. However, LGF management maintains it will not overpay for any acquisition and any deal will be accretive to the bottom line. After all, management did a fair job in its recent buying of the TV Guide network.

Due to the uncertainty surrounding the matter, I am advising subscribers to lock in profits and only keep a small portion of the name. I remember other situations where Mr. Icahn and firms he was invested in clashed. The results were not pretty.

One name that comes to mind is Temple Inland (NYSE:TIN) (19.51). When that company and Mr. Icahn came to loggerheads over a buyout offer a few years ago, Mr. Icahn nearly bankrupted them with proxy battles and legal fees. The recession did not help the situation, but Mr. Icahn put plenty of undue financial stress on the regional Texas wood, pulp and paper firm. The stock dropped from near $50 to .$3. So not playing nice with Icahn can lead to some pretty serious consequences.

The fact that there are three other major insiders involved could be a blessing to Lions Gate. These shareholders may hold firm and unite against Mr. Icahn keeping the share price firm, maybe even driving it higher. TIN did not have that luxury.

I will start adding to my much smaller position once this recent drama subsides and I will be watching options activity on LGF more intently.

Author's Disclosure: long LGF