Icahn Double Feature: A Yahoo-Lions Gate Deal?

It's safe to say that Jon Feltheimer, C.E.O. of Lions Gate, is having a bad week.

Lions Gate stock, though up from a low of $6.05 last week, has plunged to territory not seen since 2005.

Yesterday, Nikki Finke reported that Michael Burns, a Lions Gate senior executive, lost half of his stake in the company in a margin call.

And now Carl Icahn, sensing opportunity, is bumping up his Lions Gate holdings to a reported 9.17 percent.

Of course, the financial crisis has battered media stocks in general. Lions Gate isn't alone there--although Burns' margin call, and the resulting sale of a large volume of shares, probably exacerbated the slide.

But Richard Dorfman, a managing director with Richard Alan, a New York-based financial advisory and investment firm focused on the media industry, has an eye on the company's vast library of movies.

That's the one with over 6,000 flicks ranging from Dirty Dancing to the Rambo movies--and the one Icahn is probably eyeing, according to a Dorfman analysis.

The library already makes about $200 million a year for the company, and could be leveraged further, including through DVD sales and third-party licensing fees--to make Lions Gate's true value closer to $15 or $16 a share, according to Dorfman. That's more than twice the $7.20 shares closed at Wednesday.

But the Lions Gate library could end up being more of a problem in the current climate, because it could make the company a valuable target for an acquisition by, say, Yahoo. That's an idea Dorfman believes has already occurred to Icahn.

"If Yahoo buys a traditional media company like Lions Gate, all of a sudden that takes it to a whole new level," he says. "It basically would turn it into a movie distribution company"--and one well-positioned with an immensely valuable store of proprietary content, for which Yahoo conceivably could develop a profitable online distribution system.

Selling to Yahoo, we're guessing, would not be Feltheimer's first choice. But Icahn has a vested interest in increasing Yahoo's value, to recoup the investment he made in the company while lobbying for a deal with Microsoft.

As he ratchets up his involvement in Lions Gate, it's a distinct possibility that he'll use it as a chess piece in a larger game to bump up Yahoo's value.

Feltheimer certainly has other ways to goose his company's stock price without becoming a Yahoo acquisition. Just releasing another hit movie is not going to move the needle, but Lions Gate could sell off a portion of its vaunted library, precluding Icahn's maneuvering.

It could even sell its very successful television production unit--which partnered with cable channel AMC to produce Mad Men--to realize some immediate gains.

For now, it seems, Feltheimer has some time to contemplate his options. But he shouldn't dawdle, as Icahn's gears are whirring.

"Let's face it--once an activist, always an activist. Carl's been a passive investor," Dorfman says. "But now he's going to start advocating for changes and new developments."

Sophia Banay

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