Carl Icahn details tense talks with Lions Gate leading to hostile tender offer

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Carl Icahn, who launched a not-so-tender offer on Monday to raise his stake in Lions Gate Entertainment to nearly 30%, wants to put his own person on the independent studio’s board in order to scrutinize its investments in movies and television shows, as well as to reduce overhead spending, according to a Securities and Exchange Commission filing.

It is an open secret that Icahn would like to see his son Brett, who works for Icahn’s New York investment firm, on the board of Lions Gate.

Icahn, who owns 18.9% of the Santa Monica-based company’s stock, has been an outspoken critic of Lions Gate management, including Chief Executive Jon Feltheimer and Vice Chairman Michael Burns, since the fall of 2008. He has consistently complained that the company’s overhead spending is too high.

Last winter, he criticized Lions Gate’s acquisition of the TV Guide Network for $250 million, soon after which it sold 49% to an investment unit of JP Morgan Chase & Co for $125 million. Icahn threatened last year to launch a proxy battle to shake up the company’s board of directors, but he ultimately backed down.

Two weeks ago, on Feb. 16, he announced his intention to raise his stake to 29.9% with a tender offer of $6 per share. At that time, Icahn revealed his displeasure with Lions Gate’s interest in acquiring either struggling Metro-Goldwyn-Mayer Inc. or the Walt Disney Co.’s Miramax Films without shareholder approval.

Icahn formally filed his tender offer with the SEC on Monday morning, noting that Lions Gate had approached him in the spring of 2009 about providing financing for a potential acquisition of MGM, in which Icahn owns debt. However, the two sides failed to reach a deal.

The offering includes a detailed time line of Icahn’s interactions with Lions Gate management over the last year, during which his primary contact was Burns. In the filing, Icahn’s firm said Burns informed the firm that its time line ‘omits material facts.’ A Lions Gate spokesman declined to elaborate. Icahn could not immediately be reached for comment.

The current dispute between Icahn and Lions Gate began on Feb. 11, when he and his son notified Burns that they were considering increasing their firm’s stake by 11%. According to the filing, Burns ‘attempted to dissuade the Icahns from commencing a tender offer’ because it could trigger a default on the studio’s $340-million revolving credit facility.

The Icahns and Burns met on Valentine’s Day to further discuss the issue, but there was not a whole lot of loving going on. Burns proposed that to avoid a hostile tender offer, the two sides consider a ‘standstill agreement’ that would temporarily limit Icahn’s holdings in the company.

Carl and Brett Icahn responded by outlining a series of corporate governance provisions they want the studio to adopt. Those include an Icahn designee joining the board and sitting on two new committees, one to reduce overhead spending and the other to evaluate expenditures on film and TV production.

The elder Icahn has recently complained that, in addition to its overhead spending, the studio is occasionally spending more than it should on its films. Though Lions Gate typically spends far less than major studios on its productions and acquisitions, it sometimes takes bigger risks with pictures, such as the upcoming Ashton Kutcher - Katherine Heigl action comedy ‘Killers,’ which will be released in June.

The Icahns also proposed that the designee join the Lions Gate board’s strategic committee, which oversees mergers and acquisitions. The Icahns specified that they want equal status with the company’s largest shareholder, Mark Rachesky, a former associate of Carl Icahn who owns nearly 20% of Lions Gate stock and already sits on the board’s strategic committee.

They also proposed that Lions Gate not engage in any acquisition valued more than $200 million -- a number that would certainly include both MGM and Miramax -- without the approval of at least 40% of shareholders. If the company issues equity to fund an acquisition, the Icahns further suggested, current shareholders should be allowed to partake on a pro rata basis so that their holdings are not diluted.

Discussions continued on Feb. 15, Presidents Day, the filing said. When Burns declined to sign a letter that day promising that the company wouldn’t issue further stock until Feb. 20, Brett Icahn informed the vice chairman that he and his father would announce their tender offer the next morning. The Icahns feared Lions Gate would issue additional stock to a major shareholder such as Rachesky in order to dilute their holdings and sabotage their tender offer.

Last Monday, Burns informed the Icahns that JP Morgan, the lead bank for its credit facility, had agreed to increase the threshold of ownership in the company that would trigger a default from 20% to 25%. Because Carl Icahn’s offer to raise his stake to 29.9% would still cause default, Burns proposed that if the tender offer is successful, the activist shareholder sell 5% of his stake to Rachesky, which would put each of their holdings at less than 25%.

Icahn apparently believed the bank was bluffing. ‘If they were really willing to increase the ‘change in control’ trigger to 25%,’ the filing said of Icahn’s views, ‘he saw no reason why they wouldn’t go to 30%.’

Also during that discussion, Burns informed the Icahns that Lions Gate was actively researching ways to move its official corporate home out of Canada, where the company still maintains a theatrical and DVD distribution business although its top executives all work in Santa Monica. Due to provisions in Canadian law, eight of Lions Gate’s 12 board members are Canadian. In order for Brett Icahn to join the board, the studio would have to either add two Canadian directors or remove one American. The elder Icahn, not surprisingly, said he preferred the latter option.

Lions Gate submitted an application to cease being a ‘reporting issuer’ in Canada last April, the filing said, but that was rejected by authorities in British Columbia.

-- Ben Fritz and Claudia Eller

Upper photo: Carl Icahn. Credit: Mark Lennihan / Associated Press

Lower photo: Katherine Heigl and Ashton Kutcher in ‘Killers.’ Credit: Melissa Mosely / Lionsgate