October 22, 2008 / 7:33 AM / 10 years ago

Icahn's Lions Gate swoop a Hollywood thriller

LOS ANGELES/TORONTO (Hollywood Reporter) - When Carl Icahn becomes one of your company’s biggest shareholders, speculation over its future heats up pretty quickly.

Investor Carl Icahn speaks at the Wall Street Journal Deals & Deal Makers conference, held at the New York Stock Exchange, June 27, 2007. REUTERS/Chip East

Clarity over the maverick moneyman’s motives can take longer.

“Where there’s smoke, there’s usually ... smoke,” said a wag at Lions Gate Entertainment Corp on Tuesday, a day after news circulated that Icahn had acquired a 9.2% stake in the parent company of the Lionsgate film studio.

Company execs suggested Icahn’s recent share buys simply mean the oft-combative investor recognizes an undervalued stock when he sees ones — and may have opinions over how to raise its value.

“My sense is that with a bigger stake he’s going to be interested in discussing with us smart moves that he considers to be of benefit for shareholders,” Lions Gate vice chairman Michael Burns said.

Icahn may have “a couple of things on his radar” as potential acquisition targets, Burns added. He declined to say what those might be.

Meantime, Burns’ market losses turned out to be Icahn’s gain. The Lions Gate executive lost almost half of his common shares as a result of a forced liquidation by Merrill Lynch on October 10, unintentionally helping Icahn boost his 3.7% stake when the big chunk of stock came onto the market.

Regulatory filings show Merrill sold about 700,000 of Burns’ shares for a total $4 million after a margin call was triggered by the company’s share price dipping below $6. Burns had pledged the shares as collateral on a ranch that he owns near Big Sur.

Burns retains 689,000 shares in his company and significant options on others, with his remaining stake amounting to a 1.25% interest in Lions Gate. The company’s biggest shareholders remain Steinberg Asset Management and MHR Funds Management, each of which holds a 15% stake.

Lions Gate co-chairman and CEO Jon Feltheimer — who, like Burns, recently inked a multiyear exec-contract extension — has a roughly 1.5% stake in the company. Feltheimer and Burns work from corporate offices in the Los Angeles suburb of Santa Monica, but Lions Gate remains headquartered in Vancouver, B.C.; its shares trade on the New York Stock Exchange. The company’s non-operational chairman, Canadian businessman Harald Ludwig, has less than a 1% stake in Lions Gate.

Lions Gate shares hit a four-year trading low of $5.59 on October 10. The shares have rebounded but were off six cents at $7.31 on Tuesday.

Lions Gate stock was tugged down with the rest of the media/entertainment sector, but it fell less and may well rebound more quickly thanks to a clean balance sheet and positive growth prospects. Several analysts have had “buy,” “strong buy” or “outperform” ratings on the stock for months.

Miller Tabak’s David Joyce reiterated its “buy” recommendation Tuesday with a 12-month target share price of $10. Lions Gate’s reaching anything like that share price within the next year would reap a pretty profit for Icahn.

But Icahn being Icahn, speculation of a more intriguing end game will continue. And Lions Gate has been something of a lightning rod for speculation.

For starters, there’s the notion that studio companies need to be vertically integrated, owning both production and multiplatform distribution assets. Lions Gate is primarily a film company, so it’s long been considered a prime candidate for eventual takeover.

In the absence of such a takeover, there’s been talk that Lions Gate will simply continue to size up its film operations through its own acquisitions.

One of the sexiest scenarios trotted out would have Lions Gate merging with MGM — yet another studio parent company lacking sufficient vertical integration — to form a not-so-mini minimajor with a library to die for. Ex-Lions Gate co-chairman Harry Sloan now runs MGM.

Lions Gate has a rich film catalog thanks to its 2003 acquisition of Artisan Entertainment. It effectively grafted a U.K. division onto its film operations when it acquired Redbus in 2005, TV syndicator Debmar-Mercury in 2006 and film indie Mandate Pictures in 2007.

Lions Gate has no senior corporate debt, long-term bonds totaling $325 million, cash reserves of $250 million and an untapped $340 million credit facility from JPMorgan Securities. So speculation over Icahn’s motives aside, execs are feeling bullish about their prospects over the coming year, including a “Saw V” horror sequel likely to figure near the top of the box office chart this weekend.

“It’s business as usual, and we’re happy to have a world-class investor as a larger shareholder,” Burns said.

Reuters/Hollywood Reporter

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