Investor now owns 10.5% of company

There’s blood in the water over at Lionsgate, and it’s attracted Carl Icahn.

The billionaire investor picked up more than 1 million shares in the company after it reported dismal third-quarter earnings this week.

Icahn now owns more than 12.2 million shares, or a 10.5% stake in the company whose stock, he said, is “undervalued.”

It’s been a tough week for Lionsgate. Company not only saw revenue from its film, TV and homevid releases plunge but also lost a key source of pic funding, forcing it to slash the number of movies it will produce this year from 16 to 12.

Pride Pictures, a Goldman Sachs-led film fund, has wound down a financing agreement with Lionsgate after the poor performance of pics including “My Best Friend’s Girl,” “Bangkok Dangerous,” “Disaster Movie” and, more recently, “Punisher: War Zone” and “Transporter 3.” Collectively, the five pics have earned $88.5 million domestically.

Execs called the performance “a big miss” that contributed to a fiscal third-quarter loss of $93.4 million.

When the Pride fund was formed with Lionsgate nearly two years ago, the deal was for Pride to provide nearly $200 million in financing, with profits from films used to pay for additional ones.

It was used to back 15 pics, including “3:10 to Yuma.” But when recent movies underperformed, Pride managers felt there just weren’t enough profits being contributed to fund the final three pics in Lionsgate’s 2009 fiscal year — “The Spirit,” “My Bloody Valentine 3D” and “Tyler Perry’s Madea Goes to Jail.”

Deal had not been expected to continue beyond those three pics, so the conclusion of the deal didn’t come as a surprise to Lionsgate.

Still, Lionsgate will now have to carefully consider which films it will greenlight next. Company will have to self-finance or find partners on films moving forward.

It’s not a new strategy for the mini-studio, which made “Crank” with Lakeshore and brought aboard Odd Lot Entertainment for “The Spirit,” with the other company funding half of the pic’s budget in each case.

Lionsgate had to pony up its own coin for “Valentine” and the Tyler Perry laffer given that Pride ended its pact with Lionsgate earlier than expected.

Executives have already said they will begin cutting back on the number of films they greenlight in fiscal 2010 in order to try to save some $200 million in production and marketing costs.

The down economy has been rough on Hollywood, with the industry’s biggest players — from DreamWorks to MGM — having a hard time coming up with financing to produce their pics.

Lionsgate is hardly without funding on hand, however.

The studio can still rely on has Canadian film fund SGF, which provides Lionsgate with $35 million per year. Overall, the four-year deal, now in its third year, is valued at $140 million.

In addition, Lionsgate has a $340 million credit facility from JPMorgan that hadn’t been touched as of last quarter. It also ended the most recent quarter with $130 million in available cash.

Shares of Lionsgate Entertainment rebounded a bit Wednesday to close up 6% at $4.13, after falling 27% to a multiyear low of $3.90 on Tuesday. Stock has traded between $8 and $12 for most of the past four years.

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