With Icahn Talks Off, What's Next for Lionsgate?

The movie studio broke off talks with Carl Icahn, who was seeking board seats. But he and a former ally wield plenty of power, with a combined stake of 34.5%

A battle for movie studio Lions Gate Entertainment (LGF) may soon be under way. For months a pair of investors—shareholder rights activist Carl Icahn and money manager Mark Rachesky, a onetime Icahn ally—have been buying up shares in Los Angeles-based Lionsgate. Now talks between Lionsgate and Icahn, who had been seeking a pair of seats on the board, have broken down.

Lionsgate issued a Mar. 11 statement saying its board "ultimately concluded that it could not meet his request and continue to serve the best interest of all of our shareholders, which is our number one priority." That leaves Icahn with a 14.5% share and Rachesky's firm, MHR Fund Management, with nearly a 20% stake, enough to make life miserable for Lionsgate CEO Jon Feltheimer and Vice-Chairman Michael Burns if they so choose.

And with Lionsgate stock having fallen by 9.8% so far this year, the shareholding pair is likely to push the company into something dramatic. Indeed, the stock has declined despite furious buying by Icahn and Rachesky and the studio's release of a pair of movies, My Bloody Valentine and Tyler Perry's Madea Goes to Jail, that are among this year's 10 highest-grossing films.

Will Icahn Force a Merger?

Moreover, Lionsgate has a library of 8,000 films and 4,000 TV episodes that would be highly valued by a buyer, with names like Rupert Murdoch's News Corp. (NWS) already circulating. Murdoch could use Lionsgate's titles, which include the Saw franchise and TV shows like AMC's Mad Men, for his cable channels, Web sites, or worldwide array of satellites.

Icahn could also try to force Lionsgate into a merger with Metro-Goldwyn-Mayer, the fabled studio that is hobbled by almost $4 billion in debt and is controlled by money managers who are clearly underwater after a $5 billion acquisition in 2005. MGM has its own library of 8,100 older movies and more than 8,900 TV episodes, including the Pink Panther, James Bond, and Rocky franchises. Moreover, MGM is currently run by former Lionsgate co-Chairman Harry Sloan, a longtime friend of Lionsgate's Feltheimer. Lionsgate's Burns also used to work as an investment banker for Sloan.

Clearly, the Lionsgate executives were not eager to cozy up to Icahn and whatever plans he might have had for the company. During a sometimes tense three weeks of conversation, Lionsgate appeared to have tried unsuccessfully to get Icahn to sign a standstill agreement, which would have stopped him from buying more shares. Icahn had wanted to put his 29-year-old son, Brett, and at least one other ally on the board, according to sources with knowledge of the talks.

A still unanswered question is whether Icahn and Rachesky will act in concert to force their will on Lionsgate. The studio is holding out hope that the two men, who have not been particularly close in recent years, will try to block one another from exerting control. In fact, at one point the Lionsgate brass was said to consider Rachesky more of an ally than an opponent in whatever future turn their fortunes might take.

Before it's here, it's on the Bloomberg Terminal.