Inside Wall Street: Carl Icahn's Next Move in the Lion's Gate Takeover Saga

What's Carl Icahn's endgame strategy in his long, drawn-out pursuit of Lions Gate Entertainment (LGF)? When I last wrote about Icahn's takeover bid for the movie company in late March, I anticipated that the canny corporate raider would hike his bid -- then $6 a share -- to clinch the deal. He did up the ante to $7, but he has yet to win management's acceptance. Would raising his bid again make sense and finally convince Lions Gate's board to see it Icahn's way?

For sure, Icahn is looking at all angles of the quagmire he's in, but he certainly has been patient in trying to bag his quarry. After all, he's been in the stock for more than four-and-a-half years. During that period, the share price had tumbled, from $12 to $4.85 several months ago. Since making his bid, however, it has spiked up to $7, just what Icahn is offering.

Analysts figure Lions Gate's intrinsic value at around $15 a share. Icahn agrees with that calculation, so he'll surely opt to stay with the stock and probably enhance his offer again, probably to $8 a share. But this equation has a twist. The stock price could go lower after June 30, when his tender offer for the shares at $7 terminates. Icahn has publicly stated he won't extend his public tender offer. He even suggested that nobody else would want to make an offer at that price.

So the stock could, indeed, suffer and dive after June 30. To Icahn, a price drop would be golden because he could then snap up more shares at below $7. There's a good chance the stock could go back down to $6, in which case he could increase his holding, which now stands at 32%.

A Distributor, Not a Producer

Icahn in all likeihood still has the energy and will to win the movie company. With his own conjecture on how much Lions Gate is really worth, Icahn will stick to his guns. Here's how he figures the true value of Lions Gate, which produced Oscar-winning films Precious and Crash: Over the long term, he sees great potential for Lions Gate as a distributor -- but not as a producer of independent films. He also sees big promise for Lions Gate in the TV business.

But Icahn insists that for Lions Gate to prosper, it must cut back on SG&A (services, general and administrative) spending, which is now running, he laments "at an absurd $180 million a year." Icahn says Lions Gate must clean up its balance sheet, stop producing high-budget films and desist from buying expensive film libraries, such as those of MGM, which Lions Gate is trying to buy. In fact, there's talk that Lions Gate wants to buy all of MGM, which Icahn vehemently opposes.

Icahn says he has almost given up trying to get management to agree with his view about Lions Gate's strategy, including revamping the makeup of its board. He believes the only way to win is for him to keep on increasing his stake, which he says he has done through his public tender offer.

He attributes the stock's leap to $7 mainly to his buyout bid and to the stock's fortunate addition to the Russell 2000 Index. In the meantime, management says it's committed to fighting Icahn's takeover motives. The stock closed at $6.99 on June 29.

Don't Delay Too Long

Some analysts are adopting a wait-and-see attitude. "Investors should defer expectations of any upside in the stock until the managerial, fundamental and equity valuation variables become better defined," advises Jeffrey B. Logsdon, analyst at BMO Capital Markets, who has downgraded his rating on the stock to market-perform (or neutral) from outperform. He says the continued stand-off between Icahn and management could lead to a proxy fight for ultimate control, which, he expects, would llimit the stock's upside for some period of time.

But for investors who believe in Icahn as a savvy strategist, having for years survived and triumphed in many a takeover battle, buying the stock when it drops after June 30 should be a winning strategy. Waiting for a definite, positive resolution of the conflict, or the emergence of a proxy fight, may mean getting in too late to snag the lower price.

There's little chance that Icahn will bow out with his 32% stake without giving it his best shot. Matthew Harrigan, entertainment indusrtry analyst at Wunderlich Securities, estimates Lions Gate's private market value by 2012 at $15 a share. He rates the stock a buy. And he likens Icahn's endgame strategy to a "takeunder brinkmanship" that, Harrigan says, would make North Korean dictator Kim Jong Il "jealous."