Lions Gate: An Alliance Against Icahn?

With shareholder activist Carl Icahn likely poised to launch a proxy fight, Hollywood studio Lions Gate Entertainment (LGF) may be making overtures to its largest shareholder in a bid to block Icahn's advances. In a press release issued on Mar. 18, MHR Fund Management, which holds 19.9% of Lions Gate's shares, says that in "recent days" it has held "preliminary" talks with the studio about the possibility of adding an MHR nominee to its board. While no decision appears to have been made, MHR says it may continue discussions in the future.

For some weeks now, Lions Gate has been trying to build closer ties with MHR and its majority owner, Dr. Mark Rachesky, with the intent of fending off Icahn, who holds a 14.5% stake in Lions Gate. In mid-March, Icahn broke off talks about adding as many as four of his allies as board members. Icahn, who also announced he was tendering to buy much of Lions Gate's debt, has said he would mount a proxy fight, if needed, to get those seats. Icahn has not said when he may commence battle, but he's expected to do so before Lions Gate's next annual meeting. The company last held an annual meeting in September.

Neither Rachesky nor Icahn has responded to BusinessWeek's calls, but those with knowledge of the investors' actions say that the two men have both talked with Lions Gate recently and have not always appeared to be in synch. The two used to work together, with Rachesky serving as a top Icahn lieutenant. But they have shown no recent signs of being close. Moreover, Lions Gate's debt covenants include one that would be triggered if an investor accumulates a 20% stake in the company. That is likely why Rachesky has stopped buying at 19.9% of Lions Gate's stock and why Icahn has focused on buying debt instead of equity of late. Moreover, it is possible that if the two investors were to work together they could be seen as making a joint move that might trigger the loan covenant.

Icahn, who has been an investor in the company for more than three years, lately has complained that the studio, which makes the TV show Mad Men and movies like The Saw and Tyler Perry franchises, has been spending too much on overhead. Icahn's 29-year-old son, Brett, who had been acting as his father's liaison with the company, was among those Icahn had sought to add to the board.

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