Inside Wall Street: Why Carl Icahn Could Hike His Hostile Bid for Lions Gate

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Expect a sequel in this Hollywood power play: Carl Icahn is likely to raise the ante in his hostile bid to acquire Lions Gate Entertainment (LGF) -- which management quickly rejected. With animosity now in the open between the activist investor and Lions Gate CEO and Co-Chairman Jon Feltheimer, Icahn appears only more furiously determined to win.

He's offering to buy the 13 million Lions Gate shares he doesn't yet own at $6 each. He already holds more than 19% of the stock, which has inched up to around $6.20 a share on Mar. 25, from $5.95 a week ago, partly because of Icahn's offer. In all likelihood, he'll increase his price, though probably not by much if the raider stays true to his style of wanting to grab his quarry for peanuts.

With eight of the Wall Street analysts who are bullish on Lions Gate valuing the company at between $7.50 and $12 a share, Icahn will probably raise his offer to the low end of that range, perhaps $7 to $7.50 a share, according to some experienced takeover pros. Icahn declined to comment on his next move or on whether he might enhance his buyout price.

One of Media's "Most Undervalued Stocks"

Lions Gate acquires, produces and releases about 12 to 15 movies a year. Among its hits are Oscar winners Crash and Precious. Its upcoming slate includes the films Kick Ass starring Nicolas Cage, The Expendables with Sylvester Stallone, and Why Did I get Married Too, with Janet Jackson. On TV, its hit shows include Mad Men, Weeds, and Nurse Jackie. Lions Gate also owns TV Guide Network and TVGuide.com.

It's "one of the most undervalued stocks in the media industry based on our methodology," says Ockham Research of Atlanta, which points out that it's currently trading "well below its historically normal levels of price-to-cash earnings and price-to-sales."

Over the past 10 years, the stock traded at a price-to-cash earnings range of 2.33 times and 4.38 times. At its present valuation, Lions Gate is trading at just 1.19 times, or roughly half of the low end of that range, notes Ockham. Similarly, the historical price-to-sales per share range is between 0.65 times and 1.22 times. But based on the current fiscal year's sales projections, that ratio stands at only 0.49 times.

Business fundamentals at Lions Gate have improved, but the stock would have to trade at about $10 a share "just to come into line with the low end of the historical ranges" in price-to-cash earnings and price-to-sales, says Ockham. "We can't blame Icahn for trying to purchase the company for a song, but if he really wants control of Lions Gate, he will need to crack open the piggy bank for a little more coin," says Ockham.

Lacking "Meaningful Vision"


Icahn is apt to do just that. Some industry-watchers say he has no choice now but to heighten the intensity of his pursuit because of the board's stinging rebuke of his offer, which Icahn didn't expect to be so belligerent. Describing Icahn's plan as "financially inadequate and coercive and not in the best interest" of shareholders, CEO Feltheimer belittled the Icahn group as bereft of any "meaningful vision" and without any "track record of industry experience." The Icahn offer, says the CEO in a letter to shareholders, "is in stark contrast to our patient, disciplined strategy of building a strong and diversified company" over the past 10 years.

Icahn was quick to retaliate. In an open letter to the board, he ridiculed Feltheimer's attack on his supposed lack of vision: "The road to bankruptcy is littered with companies whose CEOs, under the banner of vision, have been permitted by lax board oversight to gamble their companies into oblivion." Some analysts say Icahn more than ever wants to oust the board along with Feltheimer, even if he has to pay a bit more for it.

Jeffrey B. Logsdon, analyst at BMO Capital Markets, says investors shouldn't lose sight of the "value play" in Lions Gate amid the takeover noise. He rates the company as outperform with a price target of $11 a share.

Not to Be Underestimated


Of course, some analysts doubt that an Icahn offer will get very far, especially with a poison pill that management has installed to thwart any unwelcome takeovers. But for somebody who had successfully taken over an airline as well as an oil company in recent years, and is currently in the process of acquiring ailing Atlantic City casino The Tropicana, Icahn is someone you can't underestimate.

Some investors who've played the Icahn card before came out with hefty winnings. And Lions Gate just may be another ace in Icahn's hand.
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