Hopes that Lions Gate Entertainment Corp. and its largest shareholder, Carl Icahn, were on the road to peace vaporized Tuesday as both sides took drastic actions in a renewed fight for control of the company.
As a 10-day truce between the long warring parties expired, Icahn launched another hostile bid to buy the remaining shares of Lions Gate for $6.50.
Lions Gate swiftly responded with a move to weaken Icahn's position by converting $100 million of debt into 16.2 million new shares of stock. The defensive measure immediately dropped Icahn's stake in the company to about 33.3% from just under 38%.
Although the action hurts Icahn, it means that other shareholders, including those who have been supportive of management, will see their stakes drop as well.
"This helps [Lions Gate] by diluting Icahn and reducing its debt, but it also impacts other shareholders," said Marla Backer, an analyst at Hudson Square Research Inc.
Icahn's new offer is 50 cents less than his previous proposal, which expired June 30, reflecting a 15% drop in the Santa Monica film and television studio's share value over the last several weeks. Lions Gate shares rose 50 cents, or 8.3%, to $6.53 on news of Icahn's bid.
Icahn now must acquire almost 17% of Lions Gate's stock to reach his goal of taking it over and faces the prospect of the company continuing to convert more of its debt to stock to further dilute his position.
The investor said his latest offer was conditional on Lions Gate not issuing more stock. He couldn't immediately be reached Tuesday to say how the company's move would affect his bid.
The tender offer will expire Aug. 25, after which Icahn has said he will nominate a slate of directors to replace Lions Gate's current board. He has been a longtime critic of Lions Gate Chief Executive Jon Feltheimer and Vice Chairman Michael Burns, saying spending at the studio is too high, a claim the company disputes.
The board election would take place at the company's annual meeting, which is expected to take place in October.
Icahn has yet to announce his nominees, who are expected to include his son Brett, who works at his father's New York investment firm.
On July 9, Lions Gate and Icahn agreed to a 10-day detente, during which the parties explored merger and acquisition opportunities, including a possible combination with debt-ridden studio Metro-Goldwyn-Mayer.
Management at Lions Gate had hoped that by bringing Icahn into the fold last week for merger discussions with MGM their long-running dispute could be defused. The investor apparently concluded that the prospects of reaching a deal anytime soon with MGM, which is grappling with $4 billion worth of debt, were dim.
However, in a statement Tuesday, Icahn did not rule out the possibility of pursuing future acquisitions for Lions Gate, either with management or independently. Lions Gate would not be able to merge with MGM or make any other major strategic transactions without the support of its largest shareholder.
Icahn's tender offer will be voided if Lions Gate makes any major acquisitions without his approval or if he was unable to challenge a poison-pill provision adopted by the company to prevent a takeover. The investor persuaded regulatory authorities in Canada, where Lions Gate is legally based, to block an earlier poison pill.
In a statement, the Lions Gate's board said that it would soon make a recommendation on Icahn's bid to shareholders. Given that it previously rejected his $7-a-share offer as inadequate, it's likely the board will do the same with his new proposal.
But analysts said that just the prospect of Icahn's continued involvement might prompt some shareholders to sell.
"If you're in the middle of a fight between an outside investor and management, you might get tired of the fight even if you're not tired of the investment," said Jeffrey Logsdon, an analyst at BMO Capital Markets.