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Carl Icahn continues to increase stake in Lionsgate

Icahn now owns 12% of the big independent movie and TV studio. Analysts say he may be picking up cheap shares or hoping to capitalize on the eventual sale of the company.

February 21, 2009|Claudia Eller

Lionsgate has a new Tyler Perry film opening this weekend. But that's not what Hollywood and Wall Street are buzzing about when it comes to the movie and TV industry's biggest independent studio.

One of the investment community's most feared corporate raiders -- Carl Icahn -- has taken center stage as he continues to snap up shares in the company behind the Tyler Perry and "Saw" movies and the cable shows "Mad Men" and "Weeds."

Icahn has more than doubled his holdings in Lions Gate Entertainment Corp. over the last year, and since Feb. 10 has upped his stake three times. He now owns almost 13%. The company, usually admired as a savvy and disciplined operator in the high-risk movie and TV business, has come in for a pounding from investors after reporting dismal fiscal third-quarter results and the collapse of a key film financing agreement.

Icahn's investment moves come when entertainment and media companies have fallen out of favor on Wall Street. Movies are a mature business with limited growth prospects, once-hot DVD sales are on a slide and the market for scripted television programs is shrinking.

But people who say they are familiar with the activist shareholder's designs believe that he is doubling down on Lions Gate because he sees an opportunity to acquire undervalued shares on the cheap -- and profit in the event of a sale of the company.

An investor in Lions Gate since 2005, Icahn increased his stake Oct. 20, when shares closed at $7.37. The stock has trended downward since. It hit a 52-week low of $3.90 on Feb. 10. The shares closed Friday at $4.20.

Icahn could be doing little else than buying into the game plan of Lions Gate Chief Executive Jon Feltheimer and Vice Chairman Michael Burns, who have built up the studio through strategic acquisitions of film libraries, production and distribution companies, and, most recently, a pending deal to buy cable network TV Guide Channel.

Such acquisitions could make the company more valuable as a takeover target of a bigger rival.

"Carl has one agenda: He wants to make money," Burns said. "Also, he's a firm believer in content and he knows we're an increasingly diversified entertainment company focused on content and distribution."

The normally impatient Icahn might have to wait out his Lions Gate investment. A sale any time soon seems unlikely given the distressed state of the financial markets and the problems of potential suitors such as Metro-Goldwyn-Mayer and CBS Corp.

Lions Gate this month reported a quarterly net loss of $93.4 million, primarily blamed on the weaker performance of its movies.

In an attempt to boost performance, executives said they would reduce the number of annual movie releases to 12 and cut $200 million in production and marketing costs.

Some analysts said they weren't surprised that Icahn had increased his stake in Lions Gate, given the company's recent stumble.

"He usually gets involved when a company isn't firing on all cylinders," said Anthony S. Valencia, a media analyst with investment management firm TCW. Nonetheless, he added that Icahn had not indicated dissatisfaction with Lions Gate's executive team.

"He's never talked about changing management," Valencia said, noting that Icahn had been "very vocal" about pushing for a shake-up at Yahoo Inc. -- and earlier at Time Warner Inc. -- when he bought stakes in those companies.

David Bank, an analyst with RBC Capital Markets, noted that "it's not inconceivable that [Icahn] is unhappy with the recent results and stock price and could look to wield more influence, but I'm not sure in what direction. . . . I don't think he's looked to push a particular agenda."

Many on Wall Street believe that Icahn's strategy is to see Lions Gate eventually sold, either to a major studio such as Warner Bros., which once came close to buying MGM, or even an Internet company such as Yahoo or Google.

Analysts speculate that Time Warner, which will soon be flush with $9 billion in cash after spinning off Time Warner Cable, could be a suitor as well.

Lions Gate was in merger talks last fall with Summit Entertainment, producer of the teen vampire hit "Twilight," but discussions collapsed when they couldn't agree on terms.

Analysts say that despite its problems, Lions Gate remains an attractive content play with a 12,000-title film and TV library, which generates between $80 million and $100 million a year in free cash flow.

Icahn's precise plans remain elusive to Wall Street.

"I think Icahn likes the company and thinks it's desperately undervalued," said David Miller, a media analyst with Caris & Co.

"In terms of his end game, that's unclear," added Miller, who rejected the assumption that a sale of the company was inevitable: "That's just classic Wall Street group think."


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