Shareholder will challenge poison pill defense

Carl Icahn’s decision to launch a hostile takeover of Lionsgate has raised doubts among some financial analysts, who question whether his bid of $6 per share is sufficient.

Matthew Harrigan of Wunderlich Securities described Icahn’s offer as “lowball” and gave a price target of $8.50. He estimated the stock could hit $14 by 2012, thanks to management’s target of $150 million in annual film slate profits at that point.

Doug Creutz of Cowen & Co. said the bid undervalues shares by at least 20% and rates the stock as “outperform.”

He characterized Icahn’s efforts as twofold — replacing current Lionsgate management and preventing the company from expanding its library. But he also noted that other significant shareholders are comfortable with the current Lionsgate management such as Mark Rachesky, a former Icahn associate who owns nearly 20% and has a board seat.

“Assuming Icahn’s full tender is unsuccessful, his only remaining option appears to be to raise the price of his bid,” Creutz added.

Friday’s nasty turn in the battle between Icahn and Lionsgate came just as the minimajor was set to make a binding offer on MGM.

Icahn’s $6-per-share offer was only a slight premium over Thursday’s closing price. (The shares rose 6 cents to $6.03 Friday on the New York Stock Exchange.)

The offer, which expires April 30, is conditioned on the billionaire receiving enough shares to reach 50.1% and on the withdrawal of Lionsgate’s anti-takeover “poison pill” provision. Icahn already owns 18.9% of Lionsgate.

Three weeks ago Icahn made a tender offer at $6 a share, representing a 15% premium to the price at

that time, but the stock has since gained ground.

After the market closed Friday, Lionsgate responded with a brief announcement that it would review the revised offer “promptly” without giving a timeframe and noted Icahn’s revised offer does not increase the price of his original offer.

A week earlier, the company blasted Icahn’s unsolicited bid as being too low and coercive; Lionsgate plans to ask shareholders to vote on the shareholder rights plan in May. But Icahn indicated Friday that he will go to court to block it.

The current imbroglio’s not a surprise, given Icahn’s penchant for shareholder activism. Since the 1970s, he’s waged dozens of proxy fights to pressure management to improve performance; detractors contend that his confrontational methods are counter-productive. He’s been battling with biotech concerns Genzyme and Biogen Idec and Donald Trump over Trump’s casinos.

And the Lionsgate dust-up isn’t the first fight Icahn’s had with show business. In 2005 and 2006, Icahn carried on an eight-month feud over Time Warner’s management, structure and strategy — including threatening to run an opposing slate of board candidates who would restructure TW by breaking it up into content, cable, publishing and Internet companies.

Icahn failed to attract the support he needed for a boardroom coup and Time Warner eventually managed to broker a peace, agreeing to nominate two independent directors to its board; to cut $500 million in costs in 2007, on top of $500 million in cuts already accounted for; and to repurchase up to $20 billion worth of stock.

Icahn said Friday that he was “dismayed” by the Lionsgate poison pill, which he said denies shareholders the opportunity to participate in his offer, and asserted that shareholders should be allowed to vote on library acquisitions.

“I believe that Lionsgate’s management should not further leverage up the company to purchase a film library without allowing shareholders the opportunity to decide whether increasing exposure to this segment is wise,” he said. “I believe library values are currently declining due to, in part, weak DVD sales. Lionsgate already has a major investment in a library — its own. It should be up to the shareholders to determine if they wish to more than ‘double down’ on another library, especially in light of the company’s admitted ‘substantial degree of leverage.’?”

Lionsgate’s expected to make a bid for the beleaguered MGM in the $1.4 billion-$1.8 billion range. Icahn’s tender offer includes a provision preventing Lionsgate from any acquisition that costs more than $100 million.

Icahn had previously asserted that he wasn’t trying to take over Lionsgate but simply wanted to exercise more influence over potential acquisitions such as MGM and the Miramax library. Lionsgate has portrayed the billionaire as a meddler with no showbiz experience.

Lionsgate asserted that if Icahn’s offer is successful, he would have effective “veto” power over transactions and could cause a default of Lionsgate’s credit line. Icahn spent several months last year threatening a proxy fight but backed away. At one point, he made an offer to acquire $325 million of Lionsgate debt but debtholders showed virtually no interest.

The company — home to “Precious,” “Mad Men” and “Weeds” as well as the “Saw” and Tyler Perry franchises — reported last month a loss of nearly $66 million for its third quarter ended Dec. 31 from a 15% increase in revenue of $372 million. That was an improvement over a loss of nearly $98 million in the same period a year ago.

Icahn also said Friday that if his offer is successful, he’d replace the board of directors and probably oust top management.

“I believe that the best course for Lionsgate is to pursue a strategy aimed more at the consolidation of film and television distributors, as opposed to the acquisition of library assets,” he said. “Once in place, we are hopeful that our nominees would guide Lionsgate in that strategic direction. I also believe that it may be desirable to replace top management with several individuals who more closely share our vision for the future of the company.”

Icahn also said that he’d form a committee to oversee the retention of a third party consultant tasked with “dramatically” reducing overhead. “I understand that such a dramatic shift in management and growth strategy may thrust Lionsgate into a potentially volatile period of transition, but I believe the company will emerge much stronger on the other end,” he added.

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