Monday, April 19, 2010

Risk Arbitrage and Tender Offers: Lions Gate (LGF)

New events have unfolded since we last discussed risk arbitrage situation Lions Gate Entertainment Corp (LGF). Recall that Carl Icahn announced a $6/share tender offer for LGF on March 19, which we said is far from competitive and will not be well-received by shareholders. On April 15, Icahn increased his offer to $7/share. While the 17% increase in his offer is a start, we believe that investors will still demand more. Icahn went to great lengths to explain why $6/share represents substantial value to LGF shareholders, so if we’re an LP of Icahn Partners, we would be asking why he is overpaying (by his own determination of LGF’s intrinsic value).

So why is Icahn raising his offer? “We decided to raise our offer price not because we believed $6.00 per share to be inadequate but rather because we felt it necessary to make every effort to protect the investment we currently have in Lions Gate.” Wait, what? If Icahn wants to protect his investment, but thinks $6/share is a premium valuation, then he should have sold his position when it traded at a premium to his offer.

The board has certainly stood behind management so far. However, they are said to be nearing the end of their support for the current strategy. If true, this would obviously benefit Icahn since he wants to replace management.

LGF pointed out on April 12 that the average sell-side analyst price target is $8.70/share. Indeed, friendly transactions are nearly always struck at a price above this figure. It’s hard to determine a fair takeout price, but shareholders will be very hesitant to sell to Icahn before he announces who will run the company under his control.

The shareholder vote to implement the LGF poison pill is scheduled for May 4th. Letters from both sides have been sent to shareholders encouraging them to vote for/against implementation of the pill. LGF wants to ensure that Icahn does not gain coercive control of the company with a position over 20%, and Icahn thinks pills are poor corporate governance.

We pointed out that MHR Fund Management and Capital Research (combined 37% position) oppose Icahn’s control of LGF. Icahn noted in his April 15th letter that MHR’s Mark Rachesky, his former co-worker, “has pledged his support for management and its policies and has received a special deal from the company as to certain registration rights, ‘most favored nation’ rights and other rights”. Well, now we know those two aren’t the best of friends since their split.

A separate announcement on April 15th was that Mark Cuban, of Dallas Mavericks and Broadcast.com fame, disclosed that he is an active holder of 5.4% of LGF. Cuban actively owned 14% of Register.com’s stock in 2005 and was vocal about his opposition to the acquisition by Vector Capital. He did not drum up enough support in this effort, and that deal closed four months after he announced his views. We don’t know what Cuban’s view is on the Icahn offer, but he is certainly capable of increasing his position and becoming vocal.

Does Icahn have another bid increase left in him? It’s difficult to tell, since he says one thing and does another (recall that he said he does not want to acquire LGF then weeks later announced his offer for the whole company). What we do know is that he sought to acquire Morton’s Restaurant Group (MRT) in 2002, and his bidding went from $13.50 to $15, and finally to $17/share. MRT was in a definitive agreement with Castle Harlan, and since Icahn’s offer merely matched the agreement, it was not deemed superior. As for the next important date in the LGF situation, it will be the May 4th shareholder vote

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About the Authors

Hunter is the founder of the Distressed Debt Investing Blog and the Distressed Debt Investors Club. He has worked on the buy side for the past 7 years in high yield and distressed debt investing.

Edward has been a professional investor for four years, focusing mainly on the event-driven space. His investment philosophy is value-based, and he spends the majority of his time identifying near-term catalyst based opportunities.

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hunter [at] distressed-debt-investing [dot] com