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NEWS ANALYSIS: Icahn Offer Ignores Catalog Prowess

22 Mar, 2010 By: Erik Gruenwedel

While the Lionsgate board of directors exercises its fiduciary duty entertaining last week’s $6-per-share tender offer by activist investor Carl Icahn for all outstanding common shares, common sense would dictate the bid is dead on arrival.

The offer represents barely a 2.5% premium on the Santa Monica, Calif.-based mini-major’s share price during midday trading March 22. Icahn earlier attempted to wrest 30% control of Lionsgate at the same price, and the board rejected it. Thus, it is highly unlikely that studio shareholders would hand over majority control of the company for the same $6-per-share price, analysts say.

“We are fairly certain no shareholder wants to give away their stock at $6 per share,” said David Miller, managing director, media and entertainment with Caris & Co. in Los Angeles. “If Icahn wants to raise his offer to $9, we think that is a fair offer. Of course, Lionsgate would probably disagree.”

In addition, Icahn’s fire-and-brimstone appeal to shareholders underscored his desire to halt Lionsgate from pursuing a buy of third-party catalog, notably The Walt Disney Co.’s Miramax unit and the vaunted MGM catalog, which includes more than 4,000 titles such as vintage James Bond and “Pink Panther” movies.

MGM incurred hundreds of millions of debt during its 2004 spin-off for $2.85 billion to a consortium of investors, including Sony Corp., and faces a $250 million revolving credit facility due next month.

Disney is looking to unload Miramax as it streamlines studio operations to focus on brand-based releases such as “Toy Story” and “Pirates of the Caribbean,” Pixar Animation and future Marvel titles.

“It should be up to the shareholders to determine if they wish to more than 'double down' on another library,” Icahn said last week. “I believe library values are currently declining due to, in part, weak DVD sales.”

Miller said the terminal value on MGM is about $2.3 billion, a price he said no one has come close to bidding. Lionsgate’s $1.3 billion bid has reportedly made it to second round discussions.

Despite Icahn’s concerns about the value of catalog, Lionsgate financials tell a different tale. The studio generated a record $95 million in home entertainment revenue (compared to $49 million and $17 million for theatrical and digital, respectively) in the most recent quarter — largely due to catalog releases on DVD and Blu-ray Disc.

“I think what makes Carl nervous is not so much a purchase of Miramax, which could be brought in with the current credit facility,” Miller said. “But a $1.3 billion acquisition of MGM makes [him] nervous. Assets are only [ultimately] worth what somebody is willing to pay.”

Miller said he has no issue with the studio’s overhead expenses compared to individual movie print and advertising (P&A) costs, which he considers too high.

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