Lions Gate's private convertibles exchange challenged by Carl Icahn

By Angela McDaniels

Tacoma, Wash., July 26 - Lions Gate Entertainment Inc.'s private exchange of convertible notes held by Kornitzer Capital Management, Inc. will be set aside if a lawsuit launched by the Icahn Group is successful.

As previously reported, the company issued new notes on July 20 in exchange for $36,009,000 of 3.625% convertible senior subordinated notes due 2025 and $63,709,000 of 2.9375% convertible senior subordinated notes due 2024.

Kornitzer received a principal amount of new notes equal to the principal amount of the old notes exchanged, and the new notes were converted into 16,236,306 shares of common stock of parent company Lions Gate Entertainment Corp.

The effective conversion price was $6.20 per share. Lions Gate's stock closed at $6.78 (NYSE: LGF) on Friday.

According to a news release from the Icahn Group, Kornitzer sold the new notes to an investment fund controlled by Mark Rachesky, a director and shareholder of Lions Gate, before they were converted, and the new shares give Rachesky a 28.9% ownership of the company.

The exchange was made on the same day that Carl C. Icahn and some of his affiliated entities announced a tender offer to acquire Lions Gate's common stock for $6.50 per share.

"These transactions, in which the board of directors of Lions Gate provided stock that was acquired by Mark Rachesky at the bargain price of $6.20 per share, after recently advising all Lions Gate shareholders not to accept my previous tender offer of $7.00 per share because the price was allegedly 'inadequate,' have the effect of insulating the existing directors and management from a proxy fight, as well as enriching one director at the expense of all shareholders," Icahn said in the release on Monday.

"I find this scheme especially reprehensible in light of the fact that the board recently advised shareholders that the shares were worth $8.85 per share. If Lions Gate truly wants to 'deleverage,' it should issue its stock in a rights offering open to all shareholders and use the proceeds to retire debt, rather than issue stock to one director, namely Mark Rachesky, at a bargain price."

The Icahn Group said it filed a petition on Friday in the Supreme Court of British Columbia requesting, among other things, that the note exchange and the issuance of shares to the fund controlled by Rachesky be set aside.

The British Columbia Securities Commission will hold a hearing on Wednesday to consider whether to grant orders against Lions Gate and Rachesky.

In addition, the Icahn Group is seeking preliminary and permanent injunction in New York State Supreme Court rescinding the note exchange and the issuance of shares to Rachesky's fund, prohibiting the defendants from voting their shares in any election of directors or other shareholder vote and awarding compensatory and punitive damages to the Icahn Group.

The tender offer for Lions Gate's shares expires at 8 p.m. ET on Aug. 25. The Icahn Group said Lions Gate's exchange is a breach of the conditions of the offer, but it will not exercise its right to terminate the tender offer.

The information agent is D.F. King & Co., Inc. (800 859-8511 or, for banks and brokers, 212 269-5550).

Lions Gate Entertainment Inc. is a Santa Monica, Calif.-based subsidiary of Lions Gate Entertainment Corp., which is a filmed entertainment studio with headquarters in Vancouver, B.C.

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