By Pete Gallo
Media company Lions Gate Entertainment ought to win an Oscar in the category of playing hard to get. Then again, it may not be acting. Either way, activist investor Carl Icahn is showing no sign of backing down in his renewed efforts to buy out the firm.
Readers of this column will remember Icahn’s rough courtship with Lions Gate began in 2008 and has always been contentious. That aside, one has to admire Icahn’s persistence in trying to close the deal.
Icahn Partners upped its stake in Lions Gate from 17.6 million shares at the start of the year to a hefty 32 million shares plus smaller exposure through debt holdings, based on the latest regulatory filings (as of July 1). And with a larger stake in the firm, Icahn is throwing his weight around, on August 11 lowering his takeover offer from $7 to $6.50.
The current offer, which expires on October 22, marks the second time this year the hedge fund has floated a bid. The first came in March at $7 per share, expiring in June without approval from the Lions Gate Entertainment executive board.
But this renewed buyout bid is not a direct sequel. As in any good drama, there are plot twists thrown in by the principal characters.
For starters, Icahn’s offer now attaches the strings that Lions Gate hold off on any immediate plans for acquisitions. That’s a tall order since the film, television and digital media company is already mulling a buyout of rival Metro-Goldwyn-Mayer, which put itself on the market in June after falling behind on some $3.7 billion in debt payments.
Meanwhile, Lions Gate promised to put the matter before shareholders while at the same time portraying the Icahn offer as inadequate.
More telling is that the company in June adopted a clearly anti-Icahn measure, a poison pill defense, which could result in the issuance of new shares in an effort to weaken the hedge fund suitor’s grip. One has to wonder how regular shareholders will react, as any dilution in stock value will punish Icahn and other investors equally.
That effort seems to be more than an idle threat. Icahn Partners filed suit in late July in Lions Gate Entertainment’s home province of British Columbia, Canada, in order to prevent a debt-for-equity deal arranged, according to the suit, by LGE board member and Icahn protege Mark Rachesky’s MHR Fund Management with the alleged intent of reducing Icahn’s grip on the shop. A similar suit was filed in New York.
The hedge fund also requested that the British Columbia Securities Commission issue a temporary injunction to stop Rachesky, affiliated studios and MHR from selling or buying additional shares. The request was denied by the provincial regulator in late July.
Rachesky, based on filings, owns about 29% of Lions Gate Entertainment and would seem to be the biggest stumbling block to a hedge fund buyout. The contested deal resulted in $100 million in senior notes being exchanged for new notes, convertible into common stock. The move led Icahn to publicly decry the management’s efforts to derail his bid.
Of course, management may be looking for a better offer. But is Lions Gate Entertainment worth the price tag, whether at $6.50, $7 or some similar sum?
In short, things have been looking up at Lions Gate Entertainment. The stock has been a winner this year, bouncing off a February 4 low of $4.84 and hitting a recent high of $7
on July 26.
Of course much of that is attributable to Icahn’s bidding. Whether it’s worth $767 million (at $6.50 per share) really does seem contingent on the company keeping its debt load low, which vindicates the Icahn position that buying a Metro-Goldwyn-Mayer that’s $3.7 billion in the hole on debt payments is a really bad idea—even at the proposed modest $1.4 billion price tag.
The bottom line is that MGM’s woes are underscored by a precipitous drop in DVD sales, which Lions Gate itself should consider as it makes big decisions about how to maximize its own profits through the next (and current) generation of digital downloads and content licensing.
No doubt Icahn sees the necessity to create the most opportunity for his portfolio in the here and now. Icahn sees a chance to come out a winner on an entrenched investment he started in 2008.
And the wind has been at Icahn’s back elsewhere. Icahn Partners owns 10.5 million shares in Genzyme, which in early August was considering a $70 per share bid from French drug maker Sanofi-Aventis. Icahn’s position in Genzyme will rise in value to $735 million if the deal goes through.
If activist investing is about hard work as well as luck, both seem to favor Icahn’s portfolio these days.
