Lionsgate’s Summer Success Could Hobble Carl Icahn

Riding a wave of box-office hits and Emmy wins, the embattled studio looks to turn a page on its costly proxy fight

August has been very good to Lionsgate — and that could be very bad for Carl Icahn's bid to take the entertainment company over.

The studio, which spent much of the year mired in a drawn-out proxy fight with the billionaire investor, has dominated the box office as summer draws to a close.

(See latest story: "Icahn Revises Tender Offer to Lionsgate; Now at $7.50.)

Over the past three weeks, the mini-major has competed handily with the majors, thanks to two hit films, “The Last Exorcism” and “The Expendables.” The string of good fortune comes after largely sitting the summer out last year.

That's not all.

“Kick-Ass,” which debuted on home video this month, has been one of the company’s biggest selling titles on DVD and Blu-ray. And the company’s television arm has carved out a niche for itself, producing critically beloved water-cooler shows such as “Mad Men,” "Weeds" and “Nurse Jackie,” which raked in seven Emmy wins for Lionsgate on Sunday night.

Then there’s the $1 billion streaming deal that Epix, the fledgling cable channel Lionsgate helped found, recently signed with Netflix.

“They’re on their game now,” Marla Backer, a media analyst with Hudson Square Research, told TheWrap.

Not that Lionsgate is getting much love on Wall Street. Despite spinning the ultra-low budget “Last Exorcism” into a $20 million opening over the weekend, Lionsgate’s shares were trading at $6.49, down 1.8 percent as the markets closed on Monday.

The culprit is Icahn, and the slash-and-burn campaign he’s been waging against the company’s management team for control.

“People don’t want to mess around with Carl. There are not a lot of shares to trade, and people don’t want to get involved until this plays out,” Matthew Harrigan, a media analyst with Wunderlich Securities, told TheWrap.

Icahn, who did not respond to requests for comment, has tried to portray himself as a white knight in his turf war with the studio’s management.

Following the June box-office failure of “Killers,” a $75 million action comedy with Ashton Kutcher and Katherine Heigl that brought in a lowly $47 million domestically, the billionaire investor charged that the studio was directionless.

He portrayed his tender offer as his only means to protect his and others' investment.

“[Icahn] has said that from his point of view his actions have supported the stock, but in reality he’s constrained it,” Backer said. “It's an unfair situation, because the studio has had a bunch of home runs, but with Icahn hanging over everything, they won’t get credit for it in the stock price.”

Still, a strong corporate performance may be the best defense against an Icahn-led takeover. It’s also the best chance that the leadership team of CEO Jon Feltheimer and Vice Chairman Michael Burns have of keeping their jobs. Icahn, who controls more than 30 percent of the company, has vowed to clean out the executive suite if he gains control.

Lionsgate declined to comment for this article, but close examination of the company’s fundamentals shows that it has a lot to crow about. It acquired North American and United Kingdom distribution of "The Expendables" for $15 million — that film will likely gross north of $100 million, making it perhaps the most profitable film in the studio’s history.

Likewise, rights to “Last Exorcism,” were acquired for less than $1 million, and even with a steep drop off at the box office anticipated next weekend, the film stands to be hugely profitable.

“If you look at what they’re doing, they’re really selling their bread and butter right now,” Jeff Bock, a box-office analyst with Exhibitor Relations, told TheWrap.

Upcoming films such as “Saw 3D” and the Ryan Reynolds horror film “Buried” continue the studio’s penchant for low risk and potentially high return genre films. Those releases, coupled with another Madea film from Tyler Perry in 2011, could have the company poised to continue its winning ways at the box office for the foreseeable future.

Even movies that were originally considered something of a disappointment, such as the $48 million grossing “Kick-Ass,” have been big moneymakers on home video. The superhero satire moved 1.4 million discs in its first week of release, with 37 percent of those sales coming from Blu-ray. Those Blu-ray sales spell higher profit margins for the company.

With that type of home entertainment second life, only “Killers” can be safely branded a true flop.

As for television, “Mad Men,” “Nurse Jackie,” and “Weeds” may be niche hits, but they inspire fiercely loyal fans and provide awards respectability. Moreover, Lionsgate recently scored a nice chunk of change when it sold 90 episodes of its syndicated series “Are We There Yet?” to TBS.

Most important to turning Lionsgate’s fortunes around, however, was the five-year pact Epix, the cable channel the company runs with Paramount and MGM, signed with Netflix. For roughly $200 million a year, Netflix gets to stream movies from the studios 90 days after their premium pay TV and subscription deals.

“The Netflix deal was a big win, because Epix gains distribution and they didn’t have to give away the kitchen sink like they would have had to with Comcast,” Backer said. “Plus, that doesn’t mean Comcast is off the table in the future.”

Demonstrating just how vital the distribution pact was to the cable channel’s fortunes, Feltheimer said in an analyst call recently that coupled with carriage deals with companies such as Cox and DISH Network, it will make Epix profitable less than a year after it launched.

All of which makes Icahn's tender offer of between $6.50 and $7 a share low-ball, analysts say. That conservative figure might also mean that not enough investors will be willing to surrender their shares in the company to give the billionaire the controlling stake he needs.

“I personally don’t see how people buy Carl’s argument,” Harrigan said. “With the library and TV shows the company is worth double what the stock is trading.”

Compounding the difficulties in Icahn’s pitch to Lionsgate investors is the fact that Blockbuster — the last media company he played a leadership role in — is hurtling towards bankruptcy next month. Icahn may have divested from the embattled movie rental chain, but it puts a serious dent in his argument that he is better equipped to steer Lionsgate through the enormous distribution and platform challenges currently facing the entertainment industry.

“Icahn does not have a good track record when it comes to managing media companies,” Backer said.

But even if the septuagenarian investor doesn't have a leg to stand on, Lionsgate's fortunes rest in Icahn's hands.

“He’s still there, and he’s still a wild card and until investors get him out of the way, management will continue getting a raw deal,” Backer adds.