Icahn bid bad for Lionsgate, says analyst

Transaction would trigger 'change of control' clause

NEW YORK -- Carl Icahn's bid to own nearly 30% of Lionsgate Entertainment Corp. would hurt the company's credit as the activist investor gains more influence, Moody's Investors Service said on Tuesday.

Last week, Santa Monica-based Lionsgate rejected Icahn's bid to purchase another 13.2 million shares at $6 a share, setting the stage for a showdown with the billionaire investor.

"A successful tender would put negative pressure on the company's credit rating as the company does not presently have material financial flexibility within its current credit rating," Moody's analyst Neil Begley said in a statement.

Moody's currently rates Lionsgate B2, five notches below investment-grade.

Icahn already owns 18.9% of Lionsgate and such a deal -- conditional on the studio not making large transactions outside of normal business -- would lift Icahn's stake to 29.9%, making him the largest single shareholder.

Because Icahn's new stake in Lionsgate would be greater than 20%, the transaction would trigger a "change of control," or COC, clause in the company's revolving bank loan facility, Moody's said. A COC constitutes a technical default.

Such a default would allow bank lenders to accelerate the maturity of outstanding debt, which was around $12 million as of December, Moody's said.

The default would also allow Lionsgate's bond holders to do the same, forcing the company to pony up $472 million, if the clause were not waived, said Moody's.

"The more likely impact might be a waiver of the change of control, but at the cost of an increase in the interest rate and/or fees for the company's bank facility given perception of greater risk associated with Mr. Icahn's influence," Begley said.

The subsequent rise in interest costs would hurt Lionsgate's cash flow and increase event risk, given Icahn's greater influence, lack of expertise in the movie production business and his history of aggressive shareholder-friendly tactics, Moody's said.

But, Icahn -- who owns interests in a swathe of U.S. companies, like Motorola, and is known for his past moves to influence the direction of companies such as Time Warner Inc -- has said he is not seeking to take control of Lionsgate. He told cable television network CNBC last week he wanted a greater say about any deal that might emerge in the future.

Nonetheless, "Time Warner Inc and Motorola are both examples, among others, where Mr. Icahn has exerted pressure on boards to increase shareholder value at the expense of issuer credit worthiness," said Begley.