To Lions Gate and Carl Icahn: Show me the money

The Carl Icahn v. Lions Gate battle rages on. Unfortunately it features no real suspense; rather, it’s playing out more like a bad dream, in a bad movie. While the Post Office and the related parties’ legal counsel and financial advisers all must be happy to have the work, I’m strictly thinking TiVo: fast-forward past both sides’ rhetoric and “show me the money.” As a long-time Lions Gate shareholder, I of course agree with Lions Gate’s board and its advisor Perella Weinberg, that Mr. Icahn’s $7/share offer is financially “inadequate.” At the same time, I am as perplexed as Mr. Icahn is regarding Lions Gate’s “public relation machine’s” touting of its “horrible share performance as a tale of great success.”

At $6.87/share, Lions Gate (LGF) shares may be up more than 40% in the past year, but they’re trading no higher than when they were falling off a cliff in September 2008 (the stock ultimately hit a low of around $4.20 in Feb. 2009). Note that Lions Gate traded above $10/share that summer and had flirted with $12 the spring prior, but has not been near those levels since. Thus, unless you bought and have continued to hold LGF since between 2000 and 2004, or if you were fortunate to have only recently bought shares, you are sitting on paper losses. Disregard LGF’s redundant nonsense about the “significant value” it has built over the past 10 years.

Lions Gate lost $237M combined in its fiscal years ending in March 2008 and 2009. The three fiscal years prior to that it earned a combined $54M, but in the fiscal year-ended March 2004, it lost $94M. Meantime, revenues grew 280% during that period to $1.47B. I hesitate to get excited about LGF’s cash flows, because CFFO has been starting off in the hole and then turns positive when adding back amortization, but ongoing investments typically approach the same neighborhood, and therefore, throw in some acquisitions, and you have $100s of millions being spent, which necessitates new capital. The bottom line is that LGF has assets of nearly $1.7B (up around 120% since 2004), but it is not making any money. Even if you agree to accept the cash flow story, say at $100M, the sub-6% yield in a good year is nothing to write home about. In fact, investors had been opting to write off their LGF investment.

The truth is that LGF has become a highly leveraged firm in recent years. So much so that should Mr. Icahn acquire more than 20% of LGF, the company could find itself in default under a “change in control” provision. Is default a possible outcome with material consequences or is it scaremongering by LGF’s board? Is Mr. Icahn’s bridge facility offer genuine or is it another way of trying to gain control of the company? While I don’t know the answers and don’t have a strong opinion in either direction, I encourage all shareholders to read the latest correspondence on these matters from both LGF and Mr. Icahn.

LGF’s correspondence dated April 21st and Mr. Icahn’s from April 20th are the best yet – Mr. Icahn’s is particularly entertaining. At issue is/was LGF’s shareholder rights plan, which Mr. Icahn simply refers to as the “poison pill.” Now however, the latest development is that the British Columbia Securities Commission invalidated LGF’s shareholder rights plan, although LGF is seeking permission to appeal the ruling. Thus, we have even more uncertainty, as Mr. Icahn’s tender offer at $7/share (for all outstanding shares) ends this Friday at 5 PM (unless enough shares are tendered to give him a 50%-plus stake and a two-week “subsequent offering period,” though he can still extend or amend his existing offer), and LGF’s permission to appeal is supposed to be heard on Monday. Meantime, LGF’s special meeting to vote on the rights plan has been postponed from next Tuesday, to May 12th.

At this point, I think most of LGF’s arguments are deteriorating; except for that investors are naturally opportunistic when it comes to price, and thus in this instance, as I said above, I agree that Mr. Icahn’s offer is (financially) “inadequate,” even though he obviously sees it differently through his own opportunism. LGF’s management and by extension, its board’s lack of holding them accountable, is responsible for the impaired stock price, which not only lured Mr. Icahn, but has caused him to desire control of the firm. If LGF would quit focusing so much on the top-line and actually make some money, might none of this even be taking place? Somehow visibility for profitability remains limited.

One would think that LGF insiders have proper incentives by way of stock and option ownership to want to see a higher share price. However, LGF’s less than favorable financial performance speaks for itself and has been duly reflected in its stock price. Still, maybe LGF is about to turn the corner? Ready to Kick-Ass? I hope so. But having hope is like having patience, and you can only have so much of either. And making matters worse for LGF is that leaving aside the stock purchases by Mr. Icahn (and Mr. Rachesky), where in the world were the insiders during the financial crisis and where have they been since? Finally, would whomever Mr. Icahn installed on the board and brought on to manage the company be any worse than who’s ensconced now?

Disclosure: The author owns shares of LGF.