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Carl Icahn steps up battle for control of Lions Gate

The activist shareholder indicates he may wage a proxy war for the independent movie and TV studio if it doesn't agree to add his nominees for the board.

February 26, 2009|Claudia Eller

Activist shareholder Carl Icahn, tightening his grip on the independent movie and TV studio Lions Gate Entertainment Corp., is making veiled threats of waging a proxy war for the company if it doesn't consent to add his nominees for the board.

Icahn has not yet nominated candidates. But in a regulatory filing he said he "may seek to add nominees" and may call a "special meeting" of shareholders, a signal that he is willing to take a hostile action if Lions Gate doesn't comply.

One person whom Icahn may try to seat on the board is his 29-year-old son, Brett, who has been working behind the scenes on behalf of his father with Lions Gate management, according to people familiar with the matter. Brett Icahn works with his father at Icahn Partners and has been the point person between the New York investment firm and Lions Gate ever since Carl Icahn began acquiring stock in 2005.

In recent weeks Icahn has been steadily adding to his Lions Gate holdings. He bought an additional 200,000 shares Wednesday to raise his stake to 14.5%. Icahn is the third-largest shareholder in Lions Gate after his former investment chief, Mark Rachesky, whose MHR Fund Management holds about 17%, and Steinberg Asset Management, with 15%.

The latest Icahn disclosure ups the ante for Lions Gate, which reported a $93.4-million loss in its most recent quarter as a result of the weak performance of its movies. However, in a spot of bright news, over the last weekend the studio had the top-grossing movie at the box office when "Tyler Perry's Madea Goes to Jail" opened with $41 million in ticket sales.

Analysts have said that Icahn has been investing in Lions Gate because he views the company, which also makes the "Saw" movies and the cable TV series "Weeds" and "Mad Men," as an undervalued asset with a deep film and TV library.

But Icahn also thinks that Lions Gate has excessive overhead for a company its size and is pressuring management to cut costs, a person close to the situation said. Lions Gate, which had revenue of about $1 billion for the nine months that ended Dec. 31, reported overhead for the same period of $96 million.

In the company's recent earnings call with analysts, Lions Gate Chief Executive Jon Feltheimer addressed the issue of overhead.

"It's more important to focus on bottom-line profitability than top-line growth," Feltheimer said. He noted that over the last several years, the company's overhead growth was tied to its acquisitions and investments in new businesses such as Mandate Pictures, which produced the independent hit "Juno," and independent TV syndication company Debmar-Mercury.

Although Feltheimer and Lions Gate Vice Chairman Michael Burns have had a good relationship with Icahn, the billionaire is also known to seek changes if he's unhappy with management or the company's performance. Icahn pushed for a shake-up at Yahoo Inc. recently, and earlier he sought changes at Time Warner Inc.

Feltheimer and Burns sit on Lions Gate's 12-member board. In the regulatory filing, Icahn said he might seek seats by expanding Lions Gate's board or by "removing individuals."

A person close to the situation said the fate of the executives would depend on whether they reduced overhead expenses sufficiently and whether they opposed changes that Icahn might demand on the board.

One thing that Icahn is not expected to force at this time, according to people close to the matter, is a sale of the company. With Lions Gate's stock trading at historic lows and well below the price of his initial investment, Icahn wouldn't be able to get the premium he would in a stronger market to make a sizable profit.

Lions Gate stock rose 21 cents, or 4.6%, to $4.80 a share Wednesday.


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