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Lions Gate in a vulnerable spot

With Carl Icahn threatening a proxy war, the producer of the Tyler Perry movies, 'Crash,' the 'Saw' franchise and the 'Mad Men' TV series is no longer so assured about its future.

March 20, 2009|Claudia Eller

Hollywood is littered with failed entertainment companies started by starry-eyed moguls with dreams of taking on the big studios and competing alongside them. In the case of one, success brought with it something of a nightmare.

Lions Gate Entertainment Corp., the producer of the Tyler Perry movies and the "Mad Men" cable TV series, has built itself into an enterprise that has eluded many predecessors: a viable independent studio not owned by a media giant that has interests in film, television and the Internet.

Success in Hollywood can be fleeting. After a couple of rough quarters at the box office and a plunge in its stock price, the once-stable Lions Gate suddenly faces an uncertain future. Carl Icahn, the activist shareholder who owns 14.5% of the company, is threatening to wage a proxy war to gain more control.

Jon Feltheimer and Michael Burns, the two executives who have built Lions Gate over the last nine years through a steady stream of acquisitions and brand marketing, said they were trying not to let Icahn's cage-rattling distract them.

"At the end of the day, there's nothing relevant about this in terms of our business," Feltheimer said.

Except that part of Feltheimer and Burns' business is now to defend their company against an outsider who was once an ally but has become a sharp critic of management. Signaling how seriously it takes Icahn's threat, the company is spending $2 million on a blue-chip defense team of lawyers, bankers and proxy solicitation and public relations firms.

"Icahn has been around a long time and is someone people take seriously," said Keith Gottfried, a Washington securities attorney. "Nobody's going to doubt his resolve, and to defend itself against a proxy contest is a significant and very expensive distraction."

For the moment, it appears that several key Lions Gate investors, Mark Rachesky, its largest shareholder, and longtime supporter Capital Research Global Investors, are lining up behind management. Included in that camp is John Kornitzer, the company's biggest holder of debt and among its top stockholders.

"I like the management, I like the company," said Kornitzer, whose Buffalo Funds owns about $90 million worth of convertible bonds and nearly 4 million shares of common stock. "I wish Icahn would just go crawl under a rock. . . . I'm not going to sell him any [expletive] bonds."

Icahn has made a tender offer for Lions Gate's public debt.

Inside Lions Gate's offices in Santa Monica, Feltheimer, chief executive, and Burns, vice chairman, divide up responsibilities. Feltheimer, a onetime TV executive, focuses on operations and Hollywood dealings. Burns, a former investment banker, handles finances and Wall Street -- and Icahn.

Burns, who talked with Icahn weekly before relations turned chilly, is mustering shareholder support. "We are doing all the things we should do to protect our shareholders and the value that has been created in this company by blocking and tackling and building an incredible foundation."

Feltheimer said talent agents, who are normally jumpy about the fate of their clients' projects, have expressed worry about who will run the studio. He said he assures them "we'll be here and it hasn't stopped any deal, any movie or any television show from going forward." The Lionsgate studio, for example, just clinched two more movies from its most valuable producer and actor, Tyler Perry.

Since taking over management in 2000, the two executives have transformed a small Canadian distributor into a diversified studio and major player in Hollywood by focusing on lower-cost movies including the horror series "Saw." At the same time, the company has had the occasional prestige endeavor, winning an Oscar for "Crash" and Emmys for the cable series "Mad Men."

"There are few jobs harder than building a small entertainment company into a big entertainment company," said Gordon Crawford of Capital Research, which owns 9.5% of Lions Gate. "History is rife with all the failures. . . . These guys have a pretty impressive track record of building an enduring mid-size entertainment company in a business that is capital-intensive and volatile."

Crawford, who fly-fishes with Burns, was one of Lions Gate's original investors when the company was recapitalized nine years ago. "I'm supportive of management," he said.

It could use the support. Icahn has denounced management for spending too much on overhead -- which this year is expected to approach about $130 million -- and for its recent purchase of the TV Guide cable channel. Lions Gate has also had two back-to-back quarterly losses, largely because of underperforming movies.

In the face of disappointing results compounded by the recession, Lions Gate has been cutting overhead and will make fewer films and slash production and marketing costs.

"A bad economy is the best critic on the planet," Feltheimer said. "In the world we are living in, we are continuing to look at ways to cut back."

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