Studio issues lengthy letter before billionaire 'debunks obfuscations'

Carl Icahn on Monday pledged to sell his holdings in Lionsgate if he fails in his proxy fight to take control of the minimajor’s board of directors.

Icahn’s statement came in response to a letter to shareholders from Lionsgate declaring that the billionaire has a history of “value destruction and self-serving actions.” The move came two days before Icahn’s $7 a share tender offer expires on Wednesday.

Icahn, who holds 18.8% of the company’s shares, shot back via a press release titled “Icahn debunks Lionsgate’s latest obfuscations” and reiterated his promise of a proxy fight.

“I must state that I unfortunately see very little hope for the company if we are not successful in replacing the board,” he said. “Hopefully our slate will prevail. If not, I have no intention of remaining an investor in Lionsgate with this management team because it has become clear to me after talking with management that we will never agree on the future of the company.”

Lionsgate asserted that the share value of such companies as Blockbuster, WCI Communities and BKF Capital declined after Icahn came on their boards or gained control. It said that nine of the 11 companies in which he’s gained control since 2000 have seen price declines, averaging 44%.

It also knocked the 71% price decline of Icahn Enterprises over the last three years. “If Mr. Icahn cannot create value in his own funds, how can he do so in an industry in which he has limited and unsuccessful experience?” Lionsgate said.

The minimajor also blasted Icahn over the failure of Stratosphere Entertainment, which launched in 1997 and closed in 2000. “Clearly, Mr. Icahn did not know how to run a movie company back in 1997 when he founded Stratosphere and has done nothing to prove that he knows how to run one now,” Lionsgate argued.

For his part, Icahn accused Lionsgate’s management and board of ignoring reality. “Owners of horse and buggy companies that deluded themselves and did not act quickly lost everything,” he said. “I unfortunately believe that without a dramatic change in direction, the company will be in jeopardy.”

Icahn took issue with Lionsgate touting its cash flow of $128 million for fiscal 2010, noting that $110 million of that came from the film library.

“There seems to be near universal agreement in the industry that library values are melting away like ice cubes,” he added. “As a result, it is not hard to believe that this $110 million will be drastically reduced in the near future, due primarily to the precipitous decline in DVD sales throughout the industry. However, Lions Gate’s high interest costs of $56 million will stay the same.”

He also noted that MGM and Miramax — which he identified as “basically library plays” — have been for sale for many months but have failed to obtain a buyer. “How much longer can Lions Gate’s film library be counted on to drive performance and to service the company’s staggering debt load?” Icahn asked. “Am I the only one who sees a hurricane brewing?”

The dueling announcements had little impact on the stock, which was off a penny to $6.95 in mid-session trading Monday on the New York Stock Exchange.

Icahn, in a blistering letter sent Friday to the board of directors, warned that Lionsgate may have to file for bankruptcy due to possible credit defaults. Lionsgate fired back with the assertion that it’s healthy and will be able to sort out its balance sheet. It also repeated its criticism that Icahn is making a lowball offer that shareholders should ignore.

Icahn’s bid values Lionsgate at $825 million. He’s the second-largest shareholder behind Mark Rachesky, who owns just short of 20%.

Icahn’s latest extension has dropped the requirement of a 50% support level for the offer to go through. Mark Cuban, who holds 5.3% of Lionsgate, indicated last week that he’ll tender his shares to Icahn — who said in the letter that he was hopeful that Cuban would do so. About 4% of shareholders had tendered their shares before Icahn’s latest extension.

Lionsgate hasn’t yet set its annual meeting at which the board is elected, but that usually takes place in Toronto in September during the Toronto Film Festival.

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