Lions Gate Gears Up for Icahn Tussle

The studio has hired a PR firm to defend an expected proxy fight from Carl Icahn after board seat talks broke down

Lions Gate Entertainment (LGF) is girding for battle. The Hollywood studio that made the film Crash and TV series Mad Men is squarely in the sights of shareholder activist and onetime raider Carl Icahn. To defend itself against a widely expected tussle for control with Icahn, Lions Gate has hired Joele Frank, Wilkinson Brimmer Katcher, a public relations firm that in the past has helped Motorola (MOT) contend with Icahn's activism.

Tension between Lions Gate and Icahn escalated Mar. 11 when the studio broke off talks aimed at handing board seats to the billionaire, who owns 14.5% of the company's shares and now wants to buy up as much as $325 million in Lions Gate debt that can be converted into company shares.

Lions Gate had no comment and Icahn did not return phone calls. But the battle lines are clear. In a press statement, Icahn says he backed out of talks to get seats on the Lions Gate board because he and the film company couldn't agree to terms of a standstill agreement that would have barred Icahn from increasing his stake in the company. Icahn says Lions Gate proffered the agreement "as a condition to installing those board members." Those with knowledge of the talks say Icahn wanted four board members and that Lions Gate initially offered three and was prepared to offer as many as four, including Icahn's 29-year-old son. At one point, Icahn was said to have demanded that the standstill agreement lapse if any of the board members dropped off the board. That, in effect, would have let him void the agreement and launch a proxy battle almost immediately.

In Joele Frank, Lions Gate has retained a PR firm that defended Motorola when Icahn launched an aborted proxy battle in 2007 to elect four allies to the cell phone maker's 13-member board. Eventually, Icahn dropped the bid and a lawsuit in return for two board members, including his longtime right hand, Keith Meister, who served on the board of other Icahn-controlled companies. Icahn also won the right to have Motorola "seek input" on "significant matters" from him.

Complicated Math

The situation at Lions Gate may be far more tangled. For starters, another large investor—onetime Icahn lieutenant and now New York money manager Mark Rachesky—owns a 19.7% stake in the studio and has been courted by both camps. Unlike Icahn, Rachesky did not ask for board seats but is known to be close to both Co-Chairman and CEO Jon Feltheimer and Vice-Chairman Michael Burns. Rachesky's office also did not return calls for comment.

There is also some difficult math for Icahn to overcome. In July, Lions Gate's lenders, led by JPMorgan Chase (JPM) insisted on amending the company's $340 million credit facility and added covenants that could put the studio in default were "any person or group" to buy "ownership or control in excess of 20% of equity securities." That apparently is why Rachesky stopped at just under 20% of the company, and may be why Icahn is more intent on buying up convertible debt rather than equity. And it may well be why Icahn and Rachesky could be keeping their distance from one another, so as to not be seen as working in concert on a bid that would throw their combined stake well above the 20% threshold.

What is clear is that Icahn is not likely to go away. BusinessWeek has been told that he plans to launch his proxy bid well in advance of the Lions Gate annual meeting, which last year was in September. That ought to give Lions Gate's new public relations firm plenty to spin.

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