Takeover Threat Looms as Icahn Ends Talks With Lionsgate

He had recently upped his stake in the studio and had been seeking two board seats.

Last Updated: March 12, 2010 @ 12:12 AM

The shadow of a possible hostile takeover loomed over Lions Gate Entertainment on Wednesday after activist investor Carl Icahn announced that he had broken off talks with the Vancouver-based independent studio over his desire to be given seats on the board of directors.

Icahn and the studio had been talking about the issue over the past three weeks. The investor had been seeking two board seats, having recently upped his stake in the movie studio to 14.5 percent. He has made common cause with another significant stakeholder Mark Rachefsky, who has long owned nearly 20 percent of the company’s stock.

While Lions Gate had been signaling that talks were proceeding amicably and that it hoped it would reach agreement with the investor, Icahn torpedoed that notion on Wednesday, releasing a statement that read: "We have recently been engaged in discussions with Lions Gate regarding the possibility of having a number of our designees added to Lions Gate’s board of directors. 

“Those discussions have been terminated because agreement could not be reached concerning certain aspects of the standstill agreement that Lions Gate demanded as a condition to installing those board members."

Lions Gate followed with its own statement confirming the end of discussions.

The breakdown in discussions may portend a more aggressive move by Icahn, who is one of the most activist investors in corporate America. After the company announced poor third-quarter earnings in February, Icahn bought a large chunk of Lions Gate stock and proclaimed it undervalued.

The studio declared a fiscal third-quarter loss of $93.4 million. Lions Gate is struggling on several fronts at the moment, having been forced to cut the number of releases on its slate from 16 to 12. A Goldman Sachs film fund ended its financing agreement with the studio in the wake of the poor performance of numerous releases including “Disaster Movie” and “Punisher: War Zone.”

The longtime head of the Lions Gate movie unit, Tom Ortenberg, left the company after 12 years to work with Harvey and Bob Weinstein.

But the movie studio recently had a huge hit with “Tyler Perry’s Madea Goes to Jail,” with the biggest opening weekend in the company’s history, and signed up the hit-maker to two more films.

According to one executive close to the negotiations, Icahn had been seeking two board seats. But as a Canadian-based company, Lions Gate must maintain a 2/3 majority of Canadians on the board. Two of the four American board seats are already held by Lionsgate co-chairman and CEO Jon Feltheimer and vice chairman Michael Burns.

Other issues may complicate an attempt at a hostile takeover. The company’s Canadian status requires that any bid for a change of control of the company – defined as buying more than 20 percent of the stock — trigger a tender offer for the entire company.

“It’s not that easy to make a takeover bid,” said one observer familiar with the situation. “The shareholder math is against him.”

Other major shareholders in Lions Gate include Steinberg Asset Management and Gordon Crawford.