Monday, April 19, 2010
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
Sunday, March 21, 2010
Carl Icahn is a respected, and often feared, investor with an enviable long-term track record. His successes and failures have attracted attention throughout his high-profile career. I believe his current strategy with LGF is bound to end with a resounding thud. A bidder’s credibility and intentions are important aspects in the deal process, and while no one will doubt Icahn’s credibility, I’m not sure even he knows his intentions for LGF.
First, a little background will bring us nicely up to speed. Over the course of 2008, Icahn more than doubled his holdings in LGF to a stake of 14%. People were thinking that he would dust off his poison pen, rattle the cages, and encourage a sale of the company. Icahn said in February of 2009 that he is evaluating increasing the size of the board and adding his own directors. In March, he terminated his talks with LGF, citing the failure to reach a sufficient standstill agreement. Icahn’s next move was to make a tender offer for $325 million of LGF’s senior subordinated notes at 73% of par.
At this point, we know Icahn has a problem. LGF has a very concentrated shareholder base, and the top three holders (nearly 50% combined stake) are supportive of management. Interestingly, the top holder (20%) is Mark Rachesky, who was a senior investment officer for Icahn Holdings from 1990 to 1996. Rachesky left to launch MHR Fund Management and has created his own impressive legacy. He, too, is an influential investor, and it is inauspicious for Icahn that his protégé is not siding with him on LGF.
LGF struck a deal with convertible debt holders to keep $316mn of the securities out of Icahn’s hands, by restructuring the strike price from $14.28 to $8.25, and also extending the put date from 2012 to 2015. Investors showed their lack of support for Icahn’s offer when 5% tendered their notes.
In September, Rachesky was nominated to the board. Meanwhile, Icahn quietly grew his holdings to 19%. In mid-February, with LGF trading at $5.23/share, Icahn announced a $6/share partial tender offer to increase his holdings to 29.9%. Here is why I don’t think Icahn knows his intentions for LGF: After he announced the partial tender, he went on CNBC and said that he is not seeking control of LGF, and that he wants to increase his holdings so he can have more say in potential acquisitions the company makes. (In the past, he had criticized LGF’s acquisition of the TV Guide Channel.)
On March 12, LGF recommended that shareholders not tender to Icahn’s partial offer. Management argued that the offer is inadequate, and noted that $6/share is a 30% discount to the average analyst price target. They said that, with 29.9% of the shares, Icahn could effectively veto certain transactions and would have power over fundamental decisions. LGF pointed out that the Icahn Group lacks industry experience. The company noted that a successful partial tender would constitute an event of default under its credit facilities, which would permit the lenders to accelerate the maturities of outstanding borrowings ($516 million of such notes). The board also authorized a shareholder rights plan (poison pill) to “limit the potential adverse impact…of an accumulation of a significant interest in the shares”. The plan has a threshold of 20% (note that Icahn is holding 18.9%).
On March 19, Icahn amended his offer to buy 29.9% of LGF, and is now seeking to purchase all of the common shares outstanding for $6/share. He did not change the offer price, which was previously rejected. Icahn said that he intends to pursue legal proceedings to set aside the poison pill, and that it restricts the rights of LGF shareholders to accept the offer. If more than 50.1% tender to the offer, Icahn intends to replace the board with his own nominees. Icahn went on to address the change of control provisions in the debt, and said that his group is prepared to provide a bridge facility if the provisions are triggered.
His offer is not competitive. He said one month ago that he is not seeking control of the company – now he is. The $6/share offer was rejected in the partial tender, now he wants to make it for the whole company? Curious at best. We will be sure to follow this possible merger arbitrage investing opportunity in the future.