2010.27 Mark Cuban declares that he’ll tender his Lionsgate shares to Carl Icahn; or, the perils of activist investors

For anyone following Carl Icahn’s attempt to acquire control of Lionsgate, Cuban’s announcement increases the pressure on Lionsgate management. Indeed, today management mailed a letter to shareholders touting the company’s achievements and urging investors not to tender their shares to Icahn. The letter points out that throughout the course of 2010 their business results have been on an upswing. They declare Icahn’s $7.00 share offer inadequate.

In April, when Cuban bought his shares, his intent seemed unclear. Cuban has a history with Icahn and as an investor in media-related industries. In 1998 Icahn nominated Cuban for a Yahoo board seat. In 2008, Cuban was on the investor’s proxy slate to seize control of Yahoo’s board. However, Cuban also sold Broadcast.com to Yahoo; and owns movie theater chain Landmark Theatres and film distributor Magnolia Pictures. His long involvement and interest in these industries is well established aside from any relationship he has with Icahn.

Icahn’s offer? Until Wednesday June 16, Lionsgate shareholders can tender their shares to him at $7.00 per share, up from Icahn’s previous offer of $6.00 per share (closing price today was $6.97). For a ten-day period after that he’ll keep the offer open. His current stake is almost 19%; Cuban owns 5.3% rising to just over 7% should 2,000,000 other shares be put to him; about 4% of outstanding shares have already been tendered to Icahn. Once Icahn owns 20%, a default under the terms of Lionsgate’s $340 million revolving credit facility with JPMorgan Chase will be triggered. The bank can provide a waiver; Icahn has offered to provide a bridge loan.

If Icahn’s holdings exceed 33% the top five Lionsgate executives will get a $16 million (change of control) payout. Icahn will also be able to veto any major acquisition. Icahn has said he’ll wage a proxy battle to take over the company’s board.

Separately, MHR Fund Management LLC holds 19.75% of the company’s stock and has joined with other shareholders (who collectively, including MHR, hold 34% of the stock) to support Lionsgate management against Icahn. Interestingly, MHR president and co-founder Mark Rachesky used to work for Icahn. The two claim to still be friendly though they obviously don’t agree with respect to Lionsgate.

Icahn needs the votes of 50% of the shares to win his upcoming proxy battle. That doesn’t mean he needs to own 50% of the company, but he needs to convince other shareholders that he has a better plan to maximize value. He has said he’ll replace management.

What does this all mean? First, activist investors can cause problems; this reality can be potentially worse in the public company context but we’ve also dealt with minority shareholders who can scuttle a transaction involving a private company. Indeed, sometimes just dragging your feet with respect to approving a fundraising or M&A deal is enough to kill it. Second, how your corporate and other documents are drafted matters. Watching the Icahn/Lionsgate saga unfold we can all note how Icahn targets his actions to Lionsgate’s corporate documents and debt terms. He was willing to turn to the courts to invalidate their poison pill. Watch the terms you adopt very carefully and – if you’re public – hire an investment bank and lawyer to evaluate your poison pill or other takeover defense options (before you need to). Three, investment banking can be full of drama and even exciting. But hostile takeovers remain the deal exception and not the rule – though they are much written about. Hostile takeovers are generally limited to those public companies that are large enough to justify the related legal and banking costs. But even for a private company, fights among shareholders can be costly and distracting to management (so plan such issues as succession ahead of time). Fourth, relationships matter. Many of the parties involved in this fight have long histories together. Their related insights help shape actions and responses.

It also means Cuban is no dummy. He bought his shares for prices between $5.95 and $6.27 per share in March and April, so he is making a decent trading profit by tending to Icahn.

Should Icahn win his battle for Lionsgate or should management continue to try and execute their business plan?

I commend Lionsgate management for showing strong financial results despite a very public and distracting takeover battle. I’ll post an update later as events continue to unfold.

To learn more about Hadley Partners go to www.hadleypartners.com. Email me at jones@hadleypartners.com should you have any comments (or comment below).

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