How Icahn Would Attack Lionsgate

If the billionaire investor gains control of Lionsgate, he'll likely proceed as he's done with companies such as Blockbuster and Time Warner

It's been a long time since Hollywood had a good takeover story to buzz about. Now, it appears that onetime corporate raider Carl Icahn has his sights set on Lions Gate Entertainment (LGF), the studio that brought you the TV show Mad Men and movies such as Crash and the Saw series. With each passing day, it seems, Icahn buys another chunk of Lionsgate, so far bringing his stake to more than 14%. Throw in Icahn's saying that he may ask for a special shareholder meeting to add board members, and you have the same plotline that the savvy investor has used to inch his way toward gaining control of companies from ImClone (IMCL) to Blockbuster (BBI).

Icahn won't say what he intends to do at Lionsgate, although he has told me in more general terms that "you'd be surprised at the amount of inefficiency we usually find whenever we get inside a company." I suspect he will get his chance with Lionsgate sooner rather than later. Although the company refuses comment, I figure it will play out like this: Sometime in the next few weeks (maybe days) the studio will give one or more of Icahn's associates—most likely his 28-year-old son, Brett—a seat on the board.

Then, as the billionaire investor has done at just about every company he has ever managed to get inside, Icahn will force Lionsgate to cut costs, maybe sell off assets and—you betcha—find a way to sell or merge it. A few months back there was talk that Lionsgate and MGM might merge and combine two of Hollywood's biggest film libraries, according to Alan Gould, an analyst with Natixis Bleichroeder. Gould figures that deal is off the table, as Lionsgate's stock has tanked and credit markets have dried up. I'd guess Icahn has a long-term game plan, though he isn't telling me. I bet he'll wait until he can figure out a way to lift Lionsgate's stock, even if it means combining it with another studio or selling it to, say, Rupert Murdoch. Then again, maybe Icahn still has visions of MGM in his head.

Raising His Stake in Lionsgate

Icahn and Lionsgate have had a pretty cordial relationship since May 2006, when the investor plunked his first $42 million into the company, taking a 4% stake. Until now, Lionsgate's conduit was mostly through Brett Icahn, an investment analyst for his father's firm who steered Icahn to Lionsgate as well as other media investments, including a $50 million stake in a mobile entertainment company called Motricity that put Brett on its board. There was even talk at one point about a joint venture between Lionsgate and another of Icahn's holdings, the Blockbuster video chain. Blockbuster contemplated at one point becoming a partner in the pay-TV service Epix that Lionsgate is launching with fellow studios Paramount and MGM.

It isn't clear why Blockbuster pulled out of the Epix deal. But it's sure clear that since October, Icahn has gone into overdrive, buying up shares of Lionsgate. Just since Feb. 9, when Lionsgate announced a $93.4 million loss, Icahn has plunked down $35.5 million, enough to hike his stake to 14.3%, from 9% in October.

It is also clear that Lionsgate is no Time Warner (TWX), a troubled company that Icahn tried to break up in 2006 before winning concessions, including nearly doubling its stock buyback program and cutting $1 billion in costs, all of which helped boost the value of Icahn's Time Warner stock. Lionsgate, by contrast, is considered well-run and has generally churned out lower-budget moneymakers such as its Madea series from comedian Tyler Perry (the latest, Madea Goes to Jail, just opened with a massive $41 million box-office take over Presidents Day weekend). It also has a huge library of more than 8,000 films and 4,000 TV shows. That celluloid stash could be enticing to someone like Murdoch, who covets films that he can put on his satellites and cable channels.

"What people discount is that maybe he's buying stock because they have put together a really great company," says Spark Capital venture capitalist Dennis Miller, a former Lionsgate executive. Maybe? Lionsgate CEO Jon Feltheimer is surely one of Hollywood's savviest executives. He has cleverly built the company by buying up smaller studios, TV distribution companies, and most recently the TV Guide cable channel, which he calls "prime real estate." Feltheimer plans to launch a TNT-like cable channel to run the company's TV shows and movies. I figure Icahn may value a first-class operator like Feltheimer (although Icahn's history says that if he wangles his way onto the board, he aims to find his own CEO).

Recent Box-Office Duds

For all of Feltheimer's skill in putting together his company, Icahn clearly can take issue with the results of some recent movies. The company has released several films that came up short, including The Spirit, The Punisher: War Zone, and Transporter 3. And I'm sure Feltheimer might agree. "As a company that historically achieved profitability on more than 75% of our films…this is totally unacceptable," Feltheimer conceded in a conference call with analysts. "We must do better, and we will."

Not all of Lionsgate's problems are of its own making. In its most recent quarter, a Goldman Sachs (GS)-led group of private investors pulled out of a funding agreement to help pay the costs of releasing three films. That created a "significant, unexpected" $65 million hole in the company's cash flow, as Feltheimer said in his conference call.

Significant and unexpected usually means bad things for companies. For Carl Icahn, it means opportunity.

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