Lions Gate Woos Icahn Protege With Oscar Night, Swaps Stock to Derail Bid

Lions Gate Entertainment Corp. relied on old-fashioned Hollywood schmoozing, legal wrangling and a stock deal with a friendly board member to fend off billionaire Carl Icahn’s almost two-year hostile pursuit.

Shareholders of Lions Gate, producer of cable TV’s “Mad Men” and distributor of the low-budget films “Saw” and “Buried,” yesterday denied Icahn five board seats he sought.

The 74-year-old investor, who owns almost 33 percent, let his $7.50-a-share bid for the Vancouver-based company expire this week, after a New York judge let Lions Gate board member and former Icahn protégé Mark Rachesky vote recently acquired shares. To win his prize, Icahn will likely have to raise his bid, said analyst Doug Creutz at Cowen & Co. in New York.

“They had a creative strategy that worked on a guy who doesn’t take defeat very easily,” Creutz said. “They found a lot of levers to pull.”

The defense was led by Vice Chairman Michael Burns, a former Los Angeles-based investment banker for Prudential Securities. Burns, who has run Lions Gate with Chief Executive Officer Jon Feltheimer since 2000, was one of the directors Icahn sought to oust from the 12-member board.

Burns, 52, put together a united front of investors who controlled 44 percent of Lions Gate’s stock, identified in company filings as including Rachesky, other insiders and media investor Gordon Crawford of Capital Research & Management Co.

Photographer: Rick Maiman/Bloomberg

Carl Icahn, billionaire investor and chairman of Icahn Enterprises LP. Close

Carl Icahn, billionaire investor and chairman of Icahn Enterprises LP.

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Photographer: Rick Maiman/Bloomberg

Carl Icahn, billionaire investor and chairman of Icahn Enterprises LP.

The company is still vulnerable to a higher bid from Icahn, Creutz said. “But give Burns credit this time.”

In a New York court, Icahn is still seeking to reverse the debt-for-stock transaction that diluted his stake while upping that of Rachesky, a supporter of management. Had the deal been blocked, the vote would have favored Icahn, Icahn Enterprises LP President Daniel Ninivaggi said yesterday in an interview.

‘Flagrant Abuse’

“This is the most flagrant abuse of corporate power I have ever seen,” Icahn said in an interview last week, before the court ruling and subsequent shareholder vote. “And I have seen of lot of bad things in my career.”

Lions Gate, run from Santa Monica, California, has dropped about 10 percent since Icahn’s offer expired. The shares added 3 cents to $6.67 at 4 p.m. in New York Stock Exchange composite trading. They have gained 15 percent this year.

Key to Lions Gate’s defense was Rachesky, Icahn Holding Corp.’s chief investment officer during 1990s takeover battles with companies such as E-II Holdings Inc., the parent of Samsonite luggage. He left in 1996 to start his own MHR Fund Management.

Burns invited Rachesky to movie premieres and to an Academy Awards ceremony, two Hollywood executives who work with Lions Gate said in April.

Three-Way Deal

From 2006 to mid-2009, as Icahn was building his stake in Lions Gate, Rachesky doubled his holding to about 20 percent from 9.6 percent.

Lions Gate added Rachesky, 51, as a director in July of last year, after Icahn sought and failed to place his son Brett on the studio’s board. As he joined, Rachesky agreed to support management’s candidates.

Burns said yesterday that he has refused to grant Icahn authority that he sought beyond board membership.

“Carl has my home phone number,” Burns said in an interview. “We have said all along that we are not opposed to a board seat. We’re opposed to giving him super powers that other board members don’t have.”

In July, Lions Gate exchanged $100 million of debt held by Kornitzer Capital Management for new notes that were immediately convertible, Canadian court documents show. Kornitzer, based in Shawnee Mission, Kansas, sold the new debt for $105.6 million to Rachesky, who converted it to stock at $6.20 a share -- an effective rate of $6.50, counting the premium on the debt.

‘Bitter Bidder’

The arrangement allowed Rachesky to lift his stake to almost 29 percent at a price below Icahn’s expired $7 offer. Burns received the votes he needed to deter Icahn.

“It had nothing to do with Mr. Icahn,” John Kornitzer, president of Kornitzer Capital, said in October. “I made my clients money and I got out.”

Joele Frank, an outside spokeswoman for Lions Gate, said Rachesky declined to comment.

The deal was dilutive to shareholders, Icahn has argued in court, seeking to overturn the debt swap. He is appealing a Canadian court decision, which favored Lions Gate and called Icahn a “bitter bidder.”

On Dec. 9, New York state Supreme Court Justice James Yates denied Icahn’s request for a preliminary injunction to stop Rachesky from voting the shares.

“The biggest losers are the shareholders of Lions Gate who were deprived” the opportunity to receive a premium, Icahn said in a statement yesterday after the vote.

Thwarting Icahn

Lions Gate has alternately sought to mollify Icahn and to challenge him. Brett Icahn, 31, an analyst with his father’s firm, served as an early contact with the studio, according to an executive with knowledge of the relationship who sought anonymity because the matters are private.

In October 2009, the studio contracted with Massify LLC, an online video company that Brett Icahn co-founded, to find online short films that could be made into full-length movies. Massify was to receive a producer’s fee, according an Icahn filing. No projects were made under the agreement, according to the blog on Massify’s site.

Lions Gate has used a range of tactics to thwart Icahn. As he tendered for its convertible debt in 2009, the company refinanced $66.6 million of it. To get better terms, some of the debt holders agreed to not tender to Icahn, Lions Gate also said in its filings.

Icahn’s February tender to increase his stake to just under 30 percent of the company for $6 a share was met by a warning from Burns that a change of control could trigger a default in the senior revolving credit facility.

‘Stockpiling’ MGM

On at least two occasions, Lions Gate executives discussed teaming up with Icahn to buy the struggling Metro-Goldwyn-Mayer Inc. film studio, which later filed for bankruptcy protection.

Icahn has alleged in both lawsuits that Burns and Rachesky “plotted” during a 10-day truce in July to arrange the swap with Kornitzer.

“Get me all and (Icahn) may leave,” Rachesky is purported to say in an e-mail to Burns on July 15, according to Canadian court documents. “I haven’t been wrong about him.”

Lions Gate filed its own suit in federal court in New York in October, alleging that it was deceived by Icahn. Icahn was attempting to “maximize his own benefit” by publicly criticizing a Lions Gate-MGM deal while “stockpiling” MGM debt, Lions Gate said.

‘Not Going Away’

Icahn, whose $665 million offer to acquire Dynegy Inc. was accepted today, said in a Nov. 2 court filing that he owned $596 million in MGM debt. He has said that he disclosed his MGM interest to Lions Gate.

The jousting isn’t over, said Matthew Harrigan, analyst at Wunderlich Securities in Denver, who advises clients to buy Lions Gate stock.

“They’ve managed to stall him, but Icahn is not going away,” Harrigan said. “He still has a large block of stock and he still has an interest in merging Lions Gate with MGM. And if he comes back with $9 to $10 it’s going to be a lot more difficult for Lions Gate shareholders to turn him down.”

To contact the reporters on this story: Ronald Grover in Los Angeles at rgrover5@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net.

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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