Icahn Can Just Say No at Lions Gate

Carl Icahn didn’t get what he wanted in his $7/share tender offer for Lions Gate Entertainment Inc. (NYSE: LGF), but he got enough. Icahn’s extended offer period ended June 30th with the billionaire investor boosting his share of the company to about 34%.

The stake does not give him control of the company, but, under Canadian law, he now has veto power over any transaction proposed by the company. For instance, Lions Gate’s often-rumored merger with MGM, which Icahn has consistently opposed.

Icahn has also argued that Lions Gate should leave the production business, focusing instead on distribution of independent films, leaving production to the likes of Walt Disney Co. (NYSE: DIS), DreamWorks Animation SKG Inc. (NYSE: DWA), and Sony Corp. (NYSE: SNE).

It’s hard to argue with Icahn’s analysis. Lions Gate lost money on its film business in its 2010 fiscal year ended in March. The company also lost money in its home entertainment division.

Another beef Icahn has with the company is what he calls its “absurd” overhead costs. Some of that is evident in Lions Gate’s adoption of a change-of-control provision that gave top executives a package worth $16 million if they left the company.

In response to Icahn’s newly-acquired negative hold on the company, Lions Gate this morning adopted a shareholders’ rights program that gives shareholders a right to purchase one additional share for each share owned as of July 12th and each share issued after that date. The rights become active in the event someone announces an intent to purchase 38% or more of outstanding common shares. The rights could be exercised at “a substantial discount” to the prevailing market price.

For his part, Icahn has said he will launch a proxy fight to replace Lions Gate’s board. That’s possible, but not likely, just because proxy battles are so expensive. A negotiated settlement that pays off handsomely for current managers is more likely.

Lions Gate shares have been trading around $7/share since Icahn’s offer. He has said that his offer is the only thing holding the share price at that level. One analyst has already downgraded the stock, noting that support for the $7/share price is now gone and the risk of share price declines outweighs the potential for investor gains. That about sums it up.

Paul Ausick