Lionsgate blasts takeover target
Rebuffed suitor attacks Image's 'eroding performance'
By Susanne Ault -- Video Business, 9/12/2006
SEPT. 12 | Lionsgate fired off a letter highly critical of current Image Entertainment leadership to Image shareholders Tuesday.
In this latest aggressive move toward controlling Image’s board of directors, Lionsgate paints an ugly financial picture of Image.
Certain analysts believe Image’s recent pact with Relativity boosts the indie supplier’s value (VB, 9-8), but Lionsgate dismisses the deal as insignificant.
The letter, signed by Lionsgate CEO Jon Feltheimer, notes that Image’s stock price has dropped about 39% from late 2004 to today’s $3.64 per share price. Image’s operating margins and gross margins, among other benchmarks, have declined over the last six quarters. He reiterates the validity of Lionsgate’s standing $4 offer for Image.
Of the Relativity deal, the letter states, “Image announced a distribution deal with Relativity that it hailed as ‘landmark.’ While Image says it is hopeful that the deal will result in significant financial gains for the company, it readily admits that no revenue will be realized from this deal for at least a year, and even then, the likelihood of the delivery of profitable titles at that time is doubtful.”
Lionsgate also objects to certain Relativity terms, including the decision to issue Relativity 3.4 million shares of Image stock.
Image had no comment about the letter Tuesday, but it is expected to respond formally this week.
To curry favor with shareholders, Lionsgate has created a Web site dedicated to securing Image board seats (www.votetoimproveimage.com). The site compiles recent correspondence with shareholders, latest SEC filings and voting directions. Image’s board make-up will be finalized during its Oct. 10 shareholders meeting.
Last week, Image chief operating officer David Borshell said major theatrical Relativity DVD titles will be announced by Sept. 30.
Over the last several weeks, Image management has been campaigning to re-elect its current board of directors, who have so far refused Lionsgate’s $4 a share purchase offer.
“To our bewilderment, the board continues to ignore our fully financed cash offer of $4 per share,” the Lionsgate letter states. “The offer represents a 33% premium over Image’s stock the day before we made our offer public Sept. 13, 2005.”
Earlier this year, Image formed a special committee to study all corporate acquisition bids. But Lionsgate calls the group a “sham,” complaining that five months after it formed, the committee has yet to make announcements of its progress.
Lionsgate includes a long list of reasons for Image’s “eroding” performance, including “out of control overhead, running at 14% to 15% of revenues” and “wasteful spending on film production, [in which] Image has spent $4.2 million and committed an additional $4.4 million for the remainder of fiscal 2007.”
Additionally, Lionsgate attacks Image’s inventory management system and its inability to continue to release additional titles in its signature Blue Collar comedy DVD line.
The letter closes with another rundown of Lionsgate’s picks for Image’s board, which include Starz Entertainment Group’s Edward Huguez and CinemaStar Luxury Theaters CEO Jack R. Crosby.
“We strongly believe they are far superior to Image’s current board and ask that you compare the credentials and performance of the two groups,” the letter states.
