In what felt like a prelude to a possible takeover, corporate raider Carl Icahn announced an offer Thursday to buy $325 million in debt of Lions Gate Entertainment, the independent movie and television studio.
The move followed the breakdown of talks with the studio on Wednesday over Icahn’s desire for more control at the board level.
In an interview with TheWrap, Icahn explained that talks broke down because Lionsgate would not agree to maintain the same restrictions to which he agreed for future investors. Icahn said he’d agreed to a “standstill” in exchange for the board seats – meaning he would not seek to take on further equity or start a proxy fight, if granted the board seats. Lionsgate refused, he said.
"Discussions broke down because Lionsgate refused to agree that they would apply the same restrictions to any other large shareholder that they put on the board,” Icahn said.
Having recently upped his stake in the movie studio to 14.5 percent, Icahn had been seeking two board seats to exercise more control over the company. He has made common cause with another significant stakeholder Mark Rachefsky, who has long owned nearly 20 percent of the company’s stock.
In a press release, the Icahn Group wrote that it intends "to commence a tender 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 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."
But Icahn criticized Lionsgate management for acquisition decisions and overspending. He also said he felt the company was spending far too much on operating costs, some $125 million. But the activist investor said he would not advocate any sale of Lionsgate "in this economic environment."
He also said that the TV Guide acquisition for $255 million from Macrovision in January was a mistake, because it was financed with a short-term revolving credit line. Any investor who buys more than 20 percent of Lionsgate stock – which Icahn may well seek to do – will require automatic repayment of that.
“I think that it borders on recklessness to finance an acquisition with short term revolver financing,” said Icahn. “Particularly when that financing is fragile because it comes due if a shareholder acquires more than 20 percent of the common stock.”
So what is Icahn’s plan? An individual close to his company said that the move to buy the studio’s debt was a "conservative" approach to gaining further control of the company, and putting pressure on the the company’s senior management.
Harold Vogel, a veteran investor and analyst, said the offer to buy debt was a less expensive way to assert control in the company, rather than buying more devalued stock as it continues to slide. (Read full q&a with Vogel.)
Even investors who support senior management in Jon Feltheimer and Michael Burns, such as Gordon Crawford who owns some 20 percent of Lionsgate, might feel compelled to take a strong offer from Icahn for equity. And Icahn probably knows the main bondholders and will make his offer to them directly, said Vogel.
“Is it a takeover yet? No,” he said. “Is it in that direction? Yes.”
The individual close to Icahn also said it was probably too late to mollify the raider with two board seats under the conditions that he’d sought. "Now, the game’s afoot," he said. "If they were smart they would’ve taken the deal.