When talks broke down between Carl Icahn and Lionsgate over the corporate raider’s attempt to get seats on the studio’s board, it seemed likely that relations between the two would soon turn hostile.
Now, analysts say Icahn’s offer on Thursday to purchase $325 million of Lionsgate’s debt is part of an attempt to take over the company and produce major changes in how it operates.
- Step 1: Buy Lionsgate’s debt. By offering to buy $325 million of Lionsgate’s debt, Icahn is indirectly boosting his stake in the company, as those notes can be converted into stock. Richard Dorfman, CEO of New York-based investment firm Richard Alan Inc., says that acquiring the debt “will put [Icahn] in a stronger position to take control of the company.” It will enable him to increase his stake in LGF to more than 20%, Dorfman says, without initiating the change of control provision that would force Lionsgate to pay back its $340 million revolving credit facility. Icahn denied last week that he’s looking to convert the debt, but it’s a raider’s prerogative to change his mind. And, according to veteran entertainment analyst Harold Vogel, by buying debt instead of stock, Icahn’s chosen an asset that could go up in value as opposed to one that’s likely to get wiped out if Lionsgate’s stock keeps going down.
- Step 2: Proxy fight. Icahn’s increased stake, however, will be useless unless he can get the board representation he needs to make changes in Lionsgate’s operations. And experts think a proxy fight is the way Icahn will get those seats. “The only way [a proxy fight] won’t happen is if management meets his demands,” Dorfman says. Icahn and Lionsgate’s board-seat negotiations reportedly broke down because the company was unwilling to impose the same standstill agreement it gave Icahn, stating that he would stop buying shares and wouldn’t initiate a tender offer or proxy fight, upon other potential board members who owned a lot of LGF stock. Unless the two sides can reach a compromise on this, a proxy battle seems likely.
- Step 3: Cut costs. Once Icahn gets board representation, he’ll presumably push management to slash what he believes is excessive overhead for a company of Lionsgate’s size. A source close to the situation told the LA Times that Icahn wants management to cut $30 million-$50 million from its roughly $130 million in annual overhead spending.
- Step 4: Sell Lionsgate’s library or the studio itself once economic conditions improve. But Dorfman says Icahn’s endgame isn’t cutting costs. “The company has not performed well, but it has a highly valued library and now is an optimal time [for Icahn] to shake things up,” he says. Indeed, even though Icahn said he wouldn’t sell Lionsgate in this economic environment, that doesn’t mean he won’t sniff around for a buyer now or, more likely, sell Lionsgate’s valuable library of 8,000 movies and 4,000 TV shows, which Reuters claims generates $275 million in annual revenue and $100 million in free cash flow. The library has long been considered Lionsgate’s most valued asset, and Dorfman thinks potential buyers include Rupert Murdoch, George Soros and the other investors who bought DreamWorks’ library or even YouTube or Yahoo: basically “any large studios or relatively well-capitalised Internet companies.”
Icahn hasn’t actually commenced an offer to buy Lionsgate’s debt—yet; he’s just said he intends to do so. But it’s likely Lionsgate’s investors will accept his offer, The Wrap claims:
Even investors who support senior management in Jon Feltheimer and Michael Burns, such as Gordon Crawford who owns some 20 per cent 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.
And once he boosts his stake by acquiring the notes, things could get ugly. As Vogel told The Wrap last week, “If [Lionsgate’s execs] were smart, they would’ve taken the deal.”
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