March 17, 2009 / 6:55 PM / 11 years ago

Lions Gate hires team to fend off Icahn: sources

LOS ANGELES (Reuters) - Lions Gate Entertainment Corp has hired an advisory team, including investment bank Morgan Stanley and the law firm Wachtell, Lipton, Rosen and Katz, to launch a defense against financier Carl Icahn, according to two people with knowledge of the matter.

Investor Carl Icahn speaks at the Wall Street Journal Deals & Deal Makers conference, held at the New York Stock Exchange, June 27, 2007. REUTERS/Chip East

Icahn, who controls 14.5 percent of Lions Gate’s shares, is seeking to boost his influence over the Hollywood studio by offering to buy $325 million worth of its convertible notes.

The activist shareholder has threatened to mount a proxy battle, saying he may call a special shareholders meeting to elect board directors. He told Reuters last week Lions Gate’s expenses were extremely high and called its acquisition of TV Guide cable channel reckless.

If Icahn succeeds in buying the debt and converts it all into equity, his stake in Lions Gate would double to about 28 percent to 29 percent, according to sources with knowledge of the debt terms who were not authorized to speak publicly.

But the sources were skeptical about whether Icahn would make that costly move since the conversion price is far above Lions Gate’s current share price.

Lions Gate shares jumped 8.37 percent to close at $5.31 on the New York Stock Exchange. Lions Gate — producer of the popular “Mad Men” cable TV show and “Saw” film franchise — and Icahn were not immediately available for comment.

Icahn has been accumulating Lions Gate shares since 2005 and is now the third largest shareholder. His former investment chief Mark Rachesky’s MHR Fund Management has just under 20 percent and Steinberg Asset Management has 14.6 percent.

If an investor’s stake in Lions Gate exceeds 20 percent, it could trigger a change in control, which in turn could create problems with Lions Gate’s credit facility under existing financing agreements.

Merger specialists and analysts said that facility appears to be a source of frustration on multiple levels for Icahn.

CONVERTIBLE NOTES

Talks between Icahn and Lions Gate broke down last week after they clashed over certain aspects of a standstill agreement the studio demanded of the billionaire investor before giving him board seats.

Icahn and affiliates offered on Tuesday to buy $150 million of Lions Gate’s convertible notes due 2024, at a 25 percent discount, or $750 for each $1,000 principal amount tendered. They also offered to buy $175 million convertible notes due 2025 at a 27 percent discount, or $730 for $1,000 tendered.

Besides Morgan Stanley and Wachtell Lipton, Lions Gate has also hired proxy solicitor MacKenzie Partners, which advises companies on proxy battles and unsolicited tender offers, the sources said.

Lions Gate also hired Joele Frank Wilkinson Brimmer Katcher, a public relations firm that built a reputation advising companies involved in hostile deals. It was hired by Motorola Inc in 2007 to defend the cellphone maker against Icahn. Last year, Microsoft Corp also employed Joele Frank in its takeover pursuit of Yahoo Inc.

Leading the effort at Morgan Stanley for Lions Gate are bankers Paul Taubman and Stuart Epstein, said one source.

Lions Gate has a recent hit on its hands with Tyler Perry’s “Madea Goes to Jail,” but last month posted a quarterly net loss of $93.4 million on some poor-performing films and DVD sales.

The studio’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.

Icahn told Reuters last Thursday he had no plans to advocate a sale of the company in this environment.

Additional reporting by Anupreeta Das, editing by Richard Chang and Andre Grenon

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