Icahn’s Lions Gate Bid Hits Obstacle in Rachesky

April 30 (Bloomberg) -- As Carl Icahn presses his hostile takeover bid for Lions Gate Entertainment Corp., he’s finding his biggest obstacle isn’t a “poison pill” or management -- it’s former protégé Mark Rachesky, the largest stockholder.

Rachesky, president and co-founder of MHR Fund Management LLC, holds more stock in Vancouver-based Lions Gate, 19.7 percent to Icahn’s 18.8 percent, and has sided with management since joining the independent studio’s board in September. The company is urging rejection of Icahn’s $7-a-share offer.

“He was a smart guy,” Icahn recalled in an interview. “We did some good things together.”

No more. Rachesky and other investors publicly backing management of Vancouver-based Lions Gate, led by Chief Executive Officer Jon Feltheimer, hold 34 percent of the stock, according to Bloomberg data. A vote on the company’s poison pill, designed to deter billionaire Icahn from gaining control, was tilting Lions Gate’s way before regulators in British Columbia ruled it invalid on April 27.

Icahn, 74, and Rachesky are old friends. In the early 1990s, Rachesky, who has a medical degree, was Icahn’s chief investment adviser and top lieutenant as they took large positions in biotechs like Cadus Pharmaceuticals Corp. and real estate. In 1993, Rachesky became Icahn’s representative on the board of Samsonsite parent E-II holdings.

To win, Icahn will have to increase his bid, according to David Joyce, a Miller Tabak & Co. analyst in New York who recommends buying the stock and says it could reach $8 in the next year. Rachesky declined to comment.

Higher Bid

Icahn’s offer, up from $6 originally, values the company at about $826 million. It expires tonight unless extended, which Icahn told CNBC yesterday he is likely to do.

“To get over 50 percent of the company, he clearly has to go over $7 a share,” said Alan Gould, an analyst with Soleil Securities Inc. in New York.

Lions Gate, run from Santa Monica, California, fell 8 cents to $6.92 at 4:15 p.m. in New York Stock Exchange composite trading. Shares of the company, distributor of the “Saw” films, have risen 19 percent this year.

The company said yesterday preliminary fiscal 2010 earnings before interest, tax, depreciation and amortization exceeded $115 million, compared with $75 million estimated in February. That implies Ebitda of at least $17.1 million in the fourth quarter, compared with a projected loss on that basis earlier.

A higher bid would put more pressure on Rachesky, who began buying Lions Gate in mid 2005, when the stock traded between $9 and $11 a share.

Before then, Rachesky, like Icahn, was mostly a buyer of distressed stocks. New York-based MHR Fund Management, which he started in 1996 after leaving Icahn, scooped up mobile services provider Leap Wireless International Inc. and Loral Space & Communications Inc. from bankruptcy proceedings.

Expanding Production

At the time, Lions Gate was making plans to expand film production and had purchased smaller libraries of older films from other studios. It was also gearing up to produce TV shows like “Weeds” and later “Mad Men,” the Emmy-winning drama on cable TV’s AMC network.

By 2008, when Icahn publicly reported his holdings, the stock had started to decline as industry DVD sales stalled and the value of film libraries fell. At the time of his acquisition, Icahn said he planned to “have discussions with the executive officer” about increasing profitability, according to a filing.

Unlike Icahn, who in the past had pressured companies into making changes, Rachesky had a history of working with management.

When Rachesky bought a 19 percent controlling stake in Leap Wireless, he installed Doug Hutcheson, a member of the San Diego-based company’s founding group, as CEO.

Still Friendly

Lions Gate management sought out Rachesky. The company invited him to the Academy Awards and in July, Rachesky agreed to support management’s board candidates.

Icahn and Rachesky are still friendly, the one-time boss said.

“We see each other occasionally,” said Icahn, who celebrated Rachesky’s 50th birthday with him last year. “We simply disagree about Lion’s Gate.”

Icahn, who didn’t reach an agreement for board seats at Lions Gate, has criticized management overhead, the purchase of the TV Guide cable channel and film budgets that he says are excessive.

In his tender offer, Icahn has said he would replace Feltheimer and Vice Chairman Michael Burns. He also told the CNBC show “Fast Money” yesterday the next step could be a proxy fight.

Lions Gate, which is asking Canadian courts to reinstate its poison pill, has said it is building value by increasing TV production, buying the TV Guide channel and expanding into premium cable services through the Epix movie channel with Viacom Inc. and Metro-Goldwyn-Mayer Inc.