Corporate raider Carl Icahn’s quiet stalking of Lionsgate, one of Hollywood’s few remaining independent studios, has become a full-blown hunt.
His words last week reflect the stepped-up urgency: "Lionsgate is racing down the wrong road at breakneck speed towards a precipice," he wrote in a letter to the board of directors on Friday.
UPDATE: Lionsgate’s Response Letter to Shareholders
On Thursday, Mark Cuban tendered his shares – about 5 percent of the company — to the activist shareholder, WaxWord has confirmed, taking Icahn’s stake to about 28 percent of Lionsgate.
This makes Icahn by far the largest shareholder. (That includes his previous 19 percent, plus Cuban’s, plus another 4 percent tendered for his $7-per-share offer.)
If Icahn can secure another 5 percent of the company by June 16 – not an impossibility – he can trigger control provisions as well as veto mergers and acquisitions.
So what just a few days ago seemed like a low-grade aggravation to CEO Jon Feltheimer and vice chairman Michael Burns has quickly become a potential takeover scenario from one of Wall Street’s most experienced raiders.
Here is a roadmap of what is likely to happen – and not happen.
· Icahn’s threat to force Lionsgate into bankruptcy is mainly cage-rattling. The banks that float the studio credit appear to be prepared to waive the threshold that would trigger that situation. However, that doesn’t take management out of the woods.
· As mentioned, Icahn’s tender offer expires this week, on June 16. If he can dislodge another 5 percent of the company from individual traders, he will reach the threshold he needs to begin exerting real control internally.
· If Icahn doesn’t get to the 33% threshold, his next move will be to try to take control of the board of 
directors. He has done this previously. Icahn wrote on Friday that he intends "to seek to replace the board with our nominees at the upcoming annual general meeting of shareholders" in September. If he wins control of the board, it’s game over.
· If he doesn’t win control of the board, he may well take on three or four of the 12 director spots, which may be enough to get other shareholders to presume Icahn’s takeover is a matter of time and get them to jump ship.
· Analysts for Lionsgate have suggested that the stock is likely to be worth $8.85 over time. If Icahn sweetens his offer after June 16 to remaining major shareholders, they’d be likely to sell to him. That would be a game over, too.
· If all of those moves fail, Icahn can beat a strategic retreat, letting the stock fall back to where it was before he began his low-ball tender offers at $6 and $7 per share. If the stock falls back down toward $5, he can begin the process over again.
The timing is not great for Lionsgate management to be mounting a public relations offensive in support of the status quo. The studio’s current major release, “Killers,” with Katherine Heigl and Ashton Kutcher (see photo below), cost an outsized $75 million (before tax credits) and so far has taken in just $31 million at the box office. It is likely to lose the studio money.
In addition, the studio’s summer shoulda-been-blockbuster, “Kick-Ass,” had plenty of pre-release buzz but was a disappointment at the box office, bringing in just $48 million. Studio executives had been hoping to see the low-cost film break the $100 million mark. It will still turn a healthy profit.
Meanwhile, the studio has not found a reliable replacement for the torture-porn series “Saw,” now (thankfully) at the end of its life.
Icahn has long complained that the company spends too much on overhead and that the stock has been depressed by management spending and acquisitions. His latest letter to shareholders bemoaned a "party in the management suite" and tweaked Feltheimer for driving a Bentley.
Current management argues that every stock has taken a beating since the fall of 2008, and Lionsgate has bounced back better than some. Naysayers reply that Icahn’s aggressive moves to tender have driven up the shares from where they hovered at around $5 early this year.
On the first point regarding overhead, other analysts and former executives at the company are more in agreement than not. Under this pressure, management cut overhead costs by 8 percent in the past year, by $11 million.
But shareholders might still consider the number of million-dollar-plus salaries at Lionsgate to be overkill for a medium-sized media company. They include not just Feltheimer and Burns, but co-COOs Joe Drake and Steve Beeks and Mandate CEO Nathan Kahane. (Lionsgate’s view is that their executive salaries are well within range of normal for Hollywood. And that Burns flies — horrors! — coach.)
Plenty of analysts argue convincingly that Hollywood executives are wildly overpaid for the current return on investment. And in Lionsgate’s case, there is no shelter from a parent like General Electric or Sony.
Said one former executive who is not aligned with Icahn: Lionsgate “is keeling over from being too top-heavy. There are way too many chiefs, and throughout the company there are pockets of too many Indians.”
Clearly, if Icahn wants Lionsgate badly enough, he can buy it. The billionaire made a huge windfall last year. If he ups his bid toward $9 per share, even shareholders who now are supporting Feltheimer and Burns are likely to sell.
And that would be game over, too; Icahn would probably install his son Brett at the top of the pyramid.
Which is to say that Hollywood may have a formidable new player at a very volatile time.
