Icahn Among the Bulls Entering Lions Gate

Tables: Buyers | Sellers

AS SHAREHOLDERS LEFT Lions Gate Entertainment (ticker: LGF) in droves after miserable fiscal third-quarter results Monday, two funds took the opportunity to load up on shares of the film company. The most prominent buyer, Carl Icahn, is one of the few investors who can make tongues wag as easily as a Hollywood star.

On Tuesday, the day after Lions Gate's post-market-close earnings announcement, Icahn bought 1,036,136 shares for $4.7 million, or an average per-share price of $4.53. Mark Rachesky, who runs investment firm MHR Fund Management, also increased his stake after the earnings announcement, buying 1.7 million shares for $7 million from Tuesday through Thursday, upping his stake in the company to about 18%. Rachesky is a former advisor to Icahn. Unlike Icahn, however, Rachesky's filing indicated that his investment in Lions Gate is passive, meaning he is not agitating for changes at the company.

Beyond saying in his Securities and Exchange Commission filings that he thinks the shares are undervalued and has had discussions with the firm's management, Icahn has not tipped his hand on his intentions at Lions Gate. He didn't return a phone call on Friday. Neither Lions Gate nor MHR Fund Management returned phone calls seeking comment.

Speculation about Icahn's intentions abounds.

Richard Dorfman, the chief executive officer of financial advisory and investment company Richard Alan, thinks Icahn will try to instigate a sale of the company, or perhaps form a partnership to distribute the company's film library online. Given Icahn's activist position in Yahoo (YHOO), Icahn could even be looking to bring the two companies together, Dorfman says in an interview with Barrons.com. Dorfman owns shares of Lions Gate.

Other observers have pondered whether Icahn will try to shake up management.

Analysts tend to think Icahn is simply trying to increase his position in the stock while it's cheap. Changing management at the company would be difficult, says Wunderlich Securities analyst Matthew Harrigan, who downgraded the stock to Hold from Buy after the earnings report.

"He's been pretty supportive of management in the past," Harrigan says. "There's not a lot of good studio management out there. And you'll always have some bumps in changing studio management" as new managers try to change or cut projects mid-stream.

Lions Gate on Monday posted a third-quarter loss of 81 cents per share versus analyst expectations for a loss of 27 cents. The company's problems raising money to finance films and reduced DVD sales have investors and analysts concerned. The stock fell 27% on Tuesday.

"The Lions Gate story is one that performs well during easy-money days," wrote Thomas Weisel Partners analyst Benjamin Mogil in downgrading the stock to Market Weight from Overweight. "We think the challenge now is that with those days now gone, the steady-state is at hand for Lions Gate; with a shrunken film slate and reduced DVD contribution the steady-state is not particularly exciting at this point in time."

Lions Gate's saving grace right now is its film library, which boasts titles such as The Blair Witch Project, Reservoir Dogs and Dirty Dancing, and accounts for more than 80% of its free cash flow, says StreetInsider.com vice president Jason Rasnick. Because the shares are so beaten down Raznick thinks Icahn "may be making a play at a value proposition."