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Icahn berates Lions Gate top brass

March 13, 2009|Claudia Eller

Carl Icahn, one of Wall Street's most feared corporate raiders, has taken off the gloves and ratcheted up his war with Hollywood's largest independent movie and television studio.

Breaking his silence Thursday for the first time about his displeasure with the management of Lions Gate Entertainment Corp., Icahn blasted the film and TV studio's recent $250-million acquisition of TV Guide Network and, saying it "borders on recklessness," and branded the company for what he described as its excessive overhead.

He also said in a regulatory filing that he plans to make an offer to buy much or all of the company's convertible debt -- notes that can eventually be turned into stock.

On Wednesday, Icahn broke off talks with Lions Gate about gaining several seats on its 12-member board. Lions Gate had agreed to grant Icahn some seats, but the negotiations unraveled over the terms of a so-called standstill agreement, which would have limited his ability to increase his stake in the company.

Icahn, who now owns 14.5%, said he had agreed not to tender an offer for the common stock or initiate a proxy fight -- common elements of a hostile takeover.

"It broke down because they refused to make the same standstill agreement applicable to any large shareholder they might give board representation to in the future," Icahn said in a phone interview from New York on Thursday.

He said he was surprised Lions Gate balked: "After spending all that time negotiating, I think it was shortsighted on their part."

People close to the situation said that Icahn resisted the standstill agreement because he was worried that his former investment chief, Mark Rachesky, who owns just under 20% of the stock, might make a play for the company.

Lions Gate executives would not respond publicly to Icahn's accusations.

Chief Executive Jon Feltheimer and Vice Chairman Michael Burns, who have been running Lions Gate for nine years, are under pressure from Icahn to reduce costs at the Canadian company, which operates its movie and television studio out of Santa Monica.

After reporting a third-quarter loss of $93.4 million last month, largely attributable to the weak performances of its movies, Feltheimer and Burns said the company planned to reduce the number of films its released each year and promised to slash more than $200 million of production and marketing costs.

The two have a reputation in Hollywood as strong managers who have grown the studio through strategic acquisitions of film libraries as well as production and distribution companies. Best known for producing the lucrative "Saw," the Tyler Perry movie franchises and the popular cable shows "Mad Men" and "Weeds," the company was trading at $1 a share when the pair took over. It subsequently rose to about $12 a share in 2007, although like all media stocks, it has been hammered by the market downturn and closed Thursday at $4.69, down 27 cents, or 5%.

Media analyst Harold Vogel said Icahn, who began buying the company's stock in 2005, has lost "probably half" his original investment.

Icahn divulged in his Thursday regulatory filing that he planned to make an offer for up to $325 million of Lions Gate's convertible debt. He named no price but said he would lay out his plans in an upcoming filing.

"By buying up convertible debt, he's indirectly boosting his stake in the company," said analyst Vogel. "It's not a takeover yet, but it's moving in that direction."

Asked if his end game was to force a sale of Lions Gate, Icahn said, "In this economic environment, I'm not advocating a sale of the company."

Icahn refused to directly answer a question about whether he would push to oust Feltheimer and Burns, but he nonetheless blasted management for one of its recent acquisitions and for allowing the company to operate with what he viewed as bloated overhead.

He criticized the takeover of TV Guide, saying the short-term revolving credit line used to fund the purchase would come due as soon as any shareholder buys more than 20% of Lions Gate's common stock.

"I believe this borders on recklessness," he said.

Lions Gate has a $340-million revolving credit facility led by JPMorgan Chase & Co.

The bank can consider the facility to be in default and call the entire loan in if any investor's stake exceeds 20%.

People close to the situation said that Icahn has let it be known that he would have preferred for Lions Gate to have bought back $250 million of its stock rather than spend the money on TV Guide. By reducing its outstanding number of common shares, that would have in effect boosted Icahn's stake to about 25% without his having to spend a nickel.

Lions Gate brought in $1.36 billion in revenue last year, but Icahn told The Times on Thursday that management was not doing enough to reduce the company's overhead of about $125 million annually.

"I believe it is excessive . . . for a company of this size," he said.


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