Back in February, investor Carl Icahn offered $6 a share to acquire the stock he didn’t already own in Lions Gate Entertainment Corp.LGF). At the time, Lions Gate shares were trading under $5. Icahn sweetened the offer to $7/share in April, but Lions Gate once again declared the offer inadequate. That offer valued the film maker at about $825 million.
Icahn effectively holds more than 31% of Lions Gate’s shares following the $7/share tender offer which is in effect until the end of June. He owns about 19% of Lions Gate outright.
Earlier this week Lions Gate amended its $340 million revolving credit facility to avoid defaulting on its debt if a shareholder controlled more than 50% of the company’s stock. The previous limit was 20%.
What this all has to do with Metro-Goldwyn-Mayer is that Icahn’s offer is off the table if Lions Gate acquires MGM. After rumors earlier this year that MGM and Lions Gate were talking about a merger, the issue disappeared until yesterday when the Los Angeles Times reported the merger talks were on again.
To punctuate the dispute over value, a federal court in Manhattan yesterday dismissed a suit brought by Viacom Inc. (NYSE: VIA) against Google Inc.‘s (NASDAQ: GOOG) YouTube in which Viacom was seeking $1 billion from YouTube for copyright infringement. The court ruled that under the Digital Millennium Copyright Act’s safe-harbor provisions, YouTube had not violated any of Viacom’s intellectual property rights.
The once-mighty MGM is struggling with payments for about $4 billion of debt and may even be considering a bankruptcy filing. Even if MGM didn’t cost Lions Gate a penny, how Lions Gate would pay MGM’s debt is not readily apparent. Lions Gate’s market cap is around $827 billion (mostly based on Icahn’s last offer) and it is already carrying nearly $500 million in debt of its own.
The decision means that YouTube and other web sites may use copyrighted video clips absent any protest from the copyright holder. Thus, it is now incumbent on the content generators, like Viacom or Lions Gate or MGM, to track availability of their copyrighted product. The media companies had basically argued that the job rightly belonged to YouTube and similar sites. At stake was a new revenue stream for the media companies.
The question now for the media makers is whether trying to track down all the clips will return the investment they will have to make to do so. If the court’s ruling stands, once YouTube or another site is notified that it is using copyrighted material, the site must pull the material immediately.
But there’s no money in that for the media companies. Far better would be some general licensing scheme that would put at least some money into the creators’ pockets.
As content providers, both Lions Gate and MGM are sitting on potentially lucrative properties. As a merged company they might have a chance to monetize those properties. If, however, Icahn wins the takeover struggle, he is sure to try immediately to recoup his money by selling off pieces of Lions Gate. Either way the copyrighted material is very likely to be undervalued.
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