Icahn Cracks the Whip on Lions Gate

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IT SEEMS LIONS GATE Entertainment (ticker: LGF) roused a dragon when the company rejected Carl Icahn's request to seat his hand-picked board members.

After spending four years as a relatively passive investor in the company, Icahn -- who holds about 14% of Lions Gate's shares, made a tender offer on Friday to buy 325,000 convertible bonds for more than $240 million. If he is able to buy all the remaining bonds and convert them into common shares -- debt holders have until April 20 to accept the offer -- he would own about 42 million shares, or just under 30% of the company.

Icahn has complained about Lions Gate's decision to use revolving loans to buy the TV Guide network for $255 million and its high overhead costs. He is not, however, pushing for a sale at the moment.

"I do not advocate a sale of the company in this economic environment," he said in a statement issued through his lawyer.

That said, Icahn's long-term plans for the company are unclear. He had attempted to add multiple board members, including his son Brett, but talks with the company broke off earlier this month.

Icahn's lawyer would not comment on his intentions.

Any attempt to sell the company or elect a new board could be difficult -- Lions Gate is registered as a Canadian company and Canadians must fill at least 50% of its board seats. The company's debt covenants would also be triggered if Icahn or other investors accumulated more than 20% of the stock. And even if Icahn's tender offer is successful, he would be hard-pressed to convert the shares -- the conversion price of both bond issues is well over $10 per share, whereas the stock closed at $5.44 on Monday.

Further complicating the picture, Icahn is not the only investor with a large stake in Lions Gate. The largest shareholder, Mark Rachesky of hedge fund MHR Fund Management, just raised his stake to 19.999%, according to a filing he made with the Securities and Exchange Commission last week. He stopped just short of 20% to avoid threatening the company's debt agreements, a spokesman for Rachesky says.

Rachesky is in talks with the Lions Gate management about putting a director on the company's board. Rachesky used to be one of Icahn's top deputies until the late 1990's, fueling speculation that the two have similar aims for Lions Gate. But Rachesky said in a recent filing that he has no "contracts, arrangements, understandings or relationships," with any other Lions Gate shareholders. His spokesman would not comment on whether Rachesky and the Lions Gate management have reached agreement on adding a seat to the board. Rachesky's filings indicate that he supports the company's management and its goals.

Richard Dorfman, a financial advisor and manager who owns Lions Gate stock (though less than 1% of the company's shares) says in an interview that Rachesky probably sees Lions Gate as a possible takeover target and wants to guide any potential sale. Investors should not view his talks with management as meaning he is lining up with Lions Gate against Icahn. Lions Gate's union with Rachesky probably has more to do with convenience than with any deeper alliance, he says.

"I think if Attila the Hun was a shareholder, they'd talk to him before Icahn," Dorfman says. "They're looking for supporters. That doesn't mean he's coming to their aid."

One way or the other, Icahn can move a stock. Since he became more active in accumulating Lions Gate and agitating for changes, the stock has jumped 20%. Dorfman expects he will eventually try to get Lions Gate to sell its library (including the "Saw" film franchise and "The Blair Witch Project"), or potentially the entire company.

"The handwriting's on the wall," he says.