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Carl Icahn versus Lions Gate: It's war

Talks over the corporate raider's request for board seats break down after he refuses to stop accumulating stock. A proxy fight could be ahead.

March 12, 2009|Claudia Eller

Setting the stage for a nasty proxy fight, activist shareholder Carl Icahn halted talks with Lions Gate Entertainment Corp. over his request for board seats. The breakdown occurred Wednesday after the investor refused to stop accumulating stock in the film and television studio.

For the last three weeks, Icahn, Lions Gate's third-biggest shareholder, has been negotiating with the company's management to get several seats on its 12-member board. Though Lions Gate was willing to concede some seats, Icahn wouldn't agree to a "standstill agreement" that would have blocked him from increasing his stake, which now stands at 14.5%.

Icahn was angling to install on the board his 29-year-old son, Brett, who has been the liaison between his father's New York investment firm and Lions Gate. Icahn initially requested four board seats, according to people close to the matter. The company, which is incorporated in Canada but operates out of Santa Monica, was willing to grant Icahn two seats and to jointly appoint an independent Canadian director.

At one point, according to a person with knowledge of the negotiations, Lions Gate proposed that Brett Icahn participate in board meetings as an "observer" without voting power with the provision that the company elect him as a director at the annual shareholders meeting in September.

Icahn had threatened in a regulatory filing last month that he was prepared to take hostile action if he was not given board representation either by expanding the number of directors or removing them. He said he might call a special shareholders meeting to nominate his own slate.

A shareholder in Lions Gate for nearly four years, Icahn has been pressuring the studio behind the "Saw" and Tyler Perry movie franchises to cut overhead, which runs about $130 million annually and includes a workforce of about 500. One person close to the situation said the investor wanted management to cut $30 million to $50 million in overhead costs. Board seats would give Icahn access to more financial information about the studio.

Last month Icahn snapped up additional shares after Lions Gate announced a $93.4-million net loss for the quarter, largely owing to weak results for such movies as "The Spirit," "Transporter 3" and "The Punisher: War Zone." The company's stock has been hovering at a 52-week low, closing down 32 cents to $4.96 a share Wednesday.

Lions Gate's rebuff of Icahn pits Chief Executive Jon Feltheimer and Vice Chairman Michael Burns against one of the most formidable corporate raiders on Wall Street. In previous forays into media companies, Icahn has sought to unseat management at Yahoo Inc. and Time Warner Inc. He failed in both cases but nonetheless rattled management.

"I'm surprised that both parties let it get this contentious," said David Bank, a media analyst with RBC Capital Markets in New York. "He's either going to walk away or get more activist. It's more likely this is paving the way for some sort of proxy fight."

The studio's box-office fortunes have improved in recent weeks with the release of Perry's "Madea Goes to Jail," which has grossed $76.2 million in ticket sales since it opened in February.

Any action Icahn may take will be determined by whether he wins the backing of Lions Gate's other major shareholders. Icahn's former investment chief, Mark Rachesky, whose MHR Fund Management owns almost 20%, has also been increasing his stake. The studio's second-biggest shareholder, Steinberg Asset Management, controls 15%. It is not known whether they will back Icahn or management. Capital Research & Management owns about 10% and has been supportive of Lions Gate management.

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claudia.eller@latimes.com

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