Icahn eyes Lionsgate board

Company negotiating to give investor one or two seats

Lionsgate Entertainment is likely to soon offer board seats to billionaire investor Carl Icahn, who is expected to advocate for cost cuts, asset sales and perhaps an outright sale of the film and television studio.

The company that produces the popular "Mad Men" cable TV show and "Saw" film franchise is negotiating to give Icahn one or two seats on its 12-member board, said a Hollywood executive who spoke on condition of anonymity.

The executive believed Icahn wants to install his son Brett on the board, but noted that the private talks -- aimed at avoiding a hostile proxy battle -- could break down over the issue of how many seats Icahn would get.

The activist investor has been amassing Lionsgate shares since 2005 and now owns more than 14 percent of the studio. Icahn indicated last month that he may call a special shareholder meeting to elect board members.

"It looks better for Lionsgate to keep the situation cordial, assuming he gets on the board that way. Otherwise Icahn can make an enormous nuisance of himself, waging a costly proxy fight that could depress the company's value further," said Doug Creutz, analyst with Cowen & Co.

"I wouldn't be surprised if Lionsgate announced soon that Icahn has joined their board," Creutz added.

Lions Gate, who has in the past described its relationship with Icahn as amicable, declined to comment.

Icahn was unavailable to explain his plans for the independent studio, whose shares fell to five-year lows in February. The stock is trading at around $5.15, giving Lionsgate a market value of roughly $600 million.

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.

"My sense since the first day that Icahn became involved was that he ultimately wanted to see some type of transaction occur," said Richard Dorfman, managing director of investment firm Richard Alan Inc, which owns shares in Lions Gate. "The question is whether or not it would be difficult to sell Lionsgate outright at an attractive value in this environment."

He said a sale of the film library was more likely, citing potential interest from Rupert Murdoch's News Corp. or Yahoo.

"There's a lot of value for someone like Rupert Murdoch or a company like Yahoo who can monetize the library online," Dorfman said.

What about MGM?

Lionsgate has steadily expanded by buying smaller studios and TV distribution companies, and this week closed an acquisition of the TV Guide cable channel. But like the rest of the media industry, the company is suffering from the slump in consumer spending.

While Lionsgate has a hit on its hands with Tyler Perry's "Madea Goes to Jail" and has recently cut costs and is operating on a lean budget, it still posted a quarterly net loss of $93.4 million due to some poorly performing films and DVD sales.

There has been long-running speculation in Hollywood that a combination of Lionsgate and Metro-Goldwyn-Mayer Studios Inc might make sense, given that they own two of the most storied film libraries, including the "James Bond" and "Rocky" franchises, "Dirty Dancing" and "Terminator 2."

The New York Post this week reported that Icahn has been buying up MGM debt in the hope that that could help him push for a merger with Lions Gate. But analysts were skeptical about the merits of such a combination.

"There's no obvious strategic alternative that would bring out value quickly. There's no asset to be divested or an obvious buyer right now. I don't think in this market there is a company that is spending money on a nonstrategic acquisition," Creutz said.

A spokesman for MGM -- privately held by investors including Providence Equity Partners, Texas Pacific Group, Sony Corp of America, and Comcast Corp -- said it had no knowledge of whether Icahn had bought its debt in the secondary market, but that he is not on its primary lenders' list.

Some analysts say Icahn may simply want to apply pressure to get more bang for his buck at Lions Gate, where he can push for cost cuts and asset sales. He is the third-largest investor in Lionsgate 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.

"I don't think this is necessarily a hostile play. I think he likes the company and has enthusiasm for content-weighted plays and efficiently run companies," said David Miller, analyst with Caris & Co.

Thad Davis, a mergers and acquisition attorney with Ropes & Gray, said offering Icahn a board position was a good way for Lionsgate to avoid a hostile showdown.

"It's a way for the board to allow him input without him attempting a hostile move and mounting shareholder opposition to people on the slate," Davis said.