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The Battle for Lionsgate Heats Up: Icahn Moves, Felt Countermoves

Updated Wednesday morning:

 Just this morning, Lions Gate's largest investor, Mark Rachesky, signalled his intention to change his status to "active" from "passive" investor, indicating that he may seek a seat on the board of directors.

According to a 13-D filing with the Securities and Exchange Commission today, Rachesky said he was "principally supportive of Lions Gate management and their publicly stated strategies."

It appears that Rachesky, who worked for Icahn from 1990 to 1996, is backing Lions Gate management and not his former employer.

Rachesky owns almost 20% of Lions Gate through his New York-based MHR Fund Management LLC.

 What’s Carl Icahn up to? Increasingly, it looks like he wants to attempt some kind of takeover of Lions Gate Entertainment Corp by squeezing the company through its bond-holders.

The corporate raider Tuesday announced his offer on the $325 million in Lionsgate debt that he wants to buy from bond holders. He is offering 75 cents on the dollar and 73 cents on the dollar for the two categories of debt.

That’s a premium offer, higher than where those bonds are trading currently, but lower than their face value.

 Here was the press release, which oddly did not coincide with an actual filing of the offer:

“Carl C. Icahn announced today that his affiliated entities will commence shortly the previously announced offer to purchase for cash any and all of the $150,000,000 aggregate principal amount of Lions Gate Entertainment Inc.’s 2.9375% Convertible Senior Subordinated Notes due 2024, at a price of $750 for each $1,000 of principal amount of such notes tendered, and any and all of the $175,000,000 aggregate principal amount of Lions Gate Entertainment Inc.’s 3.6250% Convertible Senior Subordinated Notes due 2025, at a price of $730 for each $1,000 of principal amount of such notes tendered, in each case plus accrued but unpaid interest from the last interest payment date to, and including, the date of purchase.”

The notes are convertible to equity. If Icahn buys the debt and converts it to shares, he will own well over 20 percent of the company. If that threshold is breached, that would put Lionsgate into default with its credit facility and throw the whole company into the jaws of a predatory takeover.

One lowball offer to the shareholders, and that sounds like an endgame.

But Lionsgate isn’t sitting still. CEO Jon Feltheimer has hired the investment bank Morgan Stanley and the law firm Wachtell, Lipton, Rosen and Katz, to launch a defense. Not to mention a high-priced public relations firm,  Joele Frank Wilkinson Brimmer Katcher, known for advising companies embroiled in hostile deals. The firm was hired by Motorola in 2007 to defend the cellphone maker against Icahn.

One major caveat: if Icahn were to convert his debt into equity, it would be an expensive gambit. The convertible notes he is seeking to buy would be worth $11.50 and $14 in equity, respectively. With the stock trading around $5, that would be a very expensive approach to take over the company.

But he can also afford to sit and wait it out -- keep his 14.5 percent equity in idle, while collecting interest on the debt he may buy.

Wall Street is watching with interest. The stock (NYSE: LGF) closed up at $5.31