Icahn's fight for Lions Gate

Icahn is fed up, but not everyone agrees that the company is being mismanaged.

Has Lions Gate Entertainment really been as mismanaged as Carl Icahn says it has?

The aging but tireless corporate raider is taking a run at the entertainment production and distribution company, disparaging management for failing shareholders. Icahn, holding roughly 19% of the company, launched the bid after talks to gain board representation broke down earlier this year. Shareholders will vote on a rights plan devised by management to thwart Icahn’s takeover bid in Toronto on May 4. “It’s designed to not allow somebody to come in and gain control of the company without giving fair value to all of our shareholders,” says Lions Gate CEO Jon Feltheimer.

In the meantime, both sides are engaging in a war of words. “I cannot help but wonder why your ‘vision’ — if so ‘meaningful’ — never translated into shareholder value?” Icahn wrote to Feltheimer. Lions Gate fought back, calling Icahn’s bid “inadequate, opportunistic and coercive,” in a letter to shareholders this month. Lost in the rhetoric is any discussion of the performance of Lions Gate itself.

Despite Icahn’s verbal pummelling, most analysts have a Buy rating on the stock and target prices much higher than Icahn’s offer to purchase the company for US$7 a share. Mark Cuban, owner of the HDNet cable channel,holds 5.4% of Lions Gate and appears to believe the company is worth more than Icahn’s valuation. He’s committed to purchasing another two million shares at $7.50 each before this January. Icahn already raised his bid by a dollar a share in mid-April, but unless he raises it again, the rights plan will likely succeed and his takeover attempt could fizzle. “It is too bad that the movement of the stock price now has to hinge upon rhetoric surrounding control premiums and activist flavor rather than core fundamentals, which we believe are quite good,” wrote David Miller, an analyst with Caris & Co. in California, in a recent research note.

Lions Gate began in Vancouver as a small distributor of low-budget films, and though technically incorporated in Canada, most of the company’s operations are now in California. Lions Gate is behind a number of critically acclaimed movies, such as Crash in 2005, and also operates a booming television business that produces Mad Men and Weeds. The division has ballooned from $55 million in revenue in 2000 to a projected $359 million in fiscal 2010.

Even so, the company is going through a rough patch. The stock price has been flat, and Lions Gate lost $163 million in fiscal 2009 on more than $1.4 billion in revenue. Part of the problem is the copany’s films disappointed at the box office last year. “It was a little surprising,” says James Marsh, an analyst at Piper Jaffray in New York. “Typically in the portfolio, the winners and losers offset each other, but it was not a good year for them.” Film revenue dropped by roughly $161 million in fiscal 2010. Feltheimer says the drop occurred in part because the company released fewer films than usual into what it believed would be a poor economic climate for movies — not because of the quality of the films.

But the company’s Saw franchise, for one, is beginning to wane. The sixth installment of the horror series underperformed last year, grossing around $60 million worldwide, whereas the previous movie topped $100 million. “If they can get a few winning films, they can put a lot of these problems behind them,” says Alan Gould, an analyst at Soleil Securities in New York. Analysts are excited about the action-adventure movie Kick-Ass, which opened in April and is projected to be the first Lions Gate movie to gross more than $100 million at the box office in the U.S.

The company has also made a couple of unorthodox investments that shareholders are waiting to see pay off. Last year, the company acquired the TV Guide Network for $255 million, a move Icahn criticized. Lions Gate is converting it from being strictly a guide to a regular entertainment channel airing movies and television shows. Analysts arewarming to the idea, as the network already had a large audience base of more than 80 million subscribers when Lions Gate purchased it. The prognosis for Epix, a new pay television channel, is less clear. A joint venture with Viacom, it launched last year but still lacks distribution deals with the major U.S. cable providers. “Investors look at that today as a goose egg,” Marsh says. “It’s worth nothing.” Feltheimer maintains it will have wide distribution within two years.

Icahn, for one, is not willing to wait. Whether or not he raises his bid is unclear, but the time for negotiation with management has largely passed. “I don’t know what we would be compromising on,” Feltheimer says. “But anytime somebody is reasonable and fair to all of our shareholders, we’re happy to have a conversation.”