Lions Gate: Board dereliction and insanity


Lions Gate (LGF) reported a surprise Q1 loss of $64.1M or $0.54/share compared to earnings of $36.3M ($0.30/share) last year — note that adjusted earnings of a net loss of $13.7M ($0.10/share) missed analyst expectations of a profit of $0.04/share. The cash flow picture is not pretty either as the business was kept cash flow positive by a $243M senior revolving credit facility. While Carl Icahn continues to battle for control of Lions Gate, my message, which I’m sure I share with other individual shareholders, is “show me the money.” (Click hyperlink for 4/28/10 post discussing Icahn v LGF). Unfortunately, LGF is losing money, the Board is giving away money to management and the militia of advisors hired to thwart Icahn, and meantime, to prove a point, Icahn has lowered his bid to $6.50/share from $7/share previously.

The evidence:

1. LGF backdoor deal (July 20) with investor and director Mark Rachesky, a protege turned rival of Icahn’s, who was able to unilaterally boost his stake via a debt-for-equity swap, at a below-market price to boot. Consider that Lions Gate’s Board has forced upon the company two shareholder rights plans, with one of the Board’s arguments being:

” … to limit the potential adverse impact on the Company, its shareholders and other stakeholders of a significant interest in Shares through a transaction such as a creeping bid that is not offered to all of the Company’s shareholders on equal terms ….” (NB: emphasis added) -Schedule 14D-9 p. 32.

2. Regarding the Board giving away money to its militia of advisers (Morgan Stanley, Perella Weinberg, MacKenzie, and Joele Frank) to thwart Icahn, see this one-liner in Lions Gate’s earnings release:

The quarter also included $7.3 million in corporate defense costs related to shareholder activist activities. [NB: emphasis added]

3. Regarding the Board giving away money to management, see this one-liner also from its earnings release:

Stock-based compensation increased $23.3 million in the first quarter, primarily reflecting accelerated vesting of restricted share units (RSU’s), stock options and stock appreciation rights caused by the triggering of change of control provisions in senior management contracts.

And to make matters worse, the Board has already approved the establishment of a $17M trust to fund LGF’s cash severance obligations due to its top-5 executives. The trust is now irrevocable and LGF may not withdraw any trust assets (except under certain conditions), until the severance obligations have been paid or the executives’ respective employment agreements expired or terminated. (Schedule 14D-9 p. 8.)

4. Meantime, LGF for some reason continues to tout its subpar performance and future prospects ….

5. With the result being for now, maintenance of the status-quo. After meeting and deliberating with its advisers on August 2nd, and thus, after “careful consideration, including a thorough review of the Icahn Group’s offer,” the Board voted unanimously to recommend that shareholders reject the offer and not tender any shares.

Disclosure: The author holds a long position in LGF, but hopefully not for much longer.