March 11, 2009 / 9:37 PM / 10 years ago

UPDATE 3-Icahn says talks with Lions Gate break down

* Icahn says terminates talks with Lions Gate

* Says Lions Gate insisted on “standstill agreement”

* Stock closes 6 pct lower (Adds Lions Gate statement)

By Sue Zeidler

LOS ANGELES, March 11 (Reuters) - Lions Gate Entertainment Corp’s LGF.N negotiations with billionaire investor Carl Icahn have broken down, raising the specter of a hostile proxy battle for control of the independent film and television studio.

The company that produces the popular “Mad Men” cable TV show and “Saw” film franchise had been in talks to give Icahn a seat or two on its 12-member board, a Hollywood executive told Reuters last week.

“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,” Icahn said in a statement on Wednesday without giving more details.

In a statement issued later on Wednesday, Lions Gate confirmed the talks had ended.

“Over the past three weeks, our board of directors has been in discussions with Mr. Icahn to consider how we could accommodate some of his requests, including the possible appointment of his designees to the board of directors,” said Lions Gate co-Chairman and Chief Executive Officer Jon Feltheimer and Vice Chairman Michael Burns, in a statement.

They said the board ultimately concluded it could not meet Icahn’s requests and continue to serve the best interests of all of its shareholders, which is its number one priority.

Some analysts and investors expect Icahn to now launch a campaign to install his own board that would include his son Brett, and advocate for a sale of certain Lions Gate assets, such as its valuable film library, or even an outright sale of the company.

Lions Gate’s library of more than 8,000 films and 4,000 TV shows is considered its most valuable asset, generating $275 million in annual revenue and $100 million in free cash flow.

Richard Dorfman, managing director of investment firm Richard Alan Inc, which owns shares in Lions Gate, believes Rupert Murdoch’s News Corp (NWSA.O) or Yahoo Inc YHOO.O would be interested in the library and potentially look to derive value from it by monetizing the titles online.

“There’s no doubt in my mind that he is posturing for some kind of strategic transaction to occur and the first step in that process may involve getting board seats,” Dorfman said of Icahn.

But Dorfman and others noted that any kind of potential sale would face challenges due to the credit crisis.

Icahn is the third-largest investor in Lions Gate, the largest independent Hollywood studio, with a 14.5 percent stake. His former investment chief Mark Rachesky’s MHR Fund Management has 19.4 percent and Steinberg Asset Management has 14.6 percent.

Analysts and investors have also speculated that Icahn and Rachesky could combine forces.

“The two of them have about 35 percent and it’s conceivable to think they could get another 16 percent, which would give them control of the board, should they want it,” said David Bank, an analyst with RBC Capital Markets.

Neither Icahn, nor Rachesky could be reached immediately available for comment.

Lions Gate saw its shares fall to five-year lows in February and posted a quarterly net loss of $93.4 million due to some poorly performing films and DVD sales.

Icahn, who has been amassing Lions Gate shares since 2005, indicated last month he may call a special shareholder meeting to elect board members, but then the investor and company began talking as a way to prevent that.

The stock closed down about 6 percent, or 32 cents, to $4.96 on Wednesday, giving Lions Gate a market value of roughly $610 million. (Reporting by Sue Zeidler, editing by Tiffany Wu, Andre Grenon and Carol Bishopric)

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