Business

Hard lesson to learn

The teacher is fighting back against his onetime protégé.

Carl Icahn, who once employed Mark Rachesky as his chief investment adviser, yesterday sued Lionsgate Entertainment to reverse Rachesky’s stock purchase that diluted Icahn’s stake in the studio and hinders the veteran shareholder activist’s attempt for a hostile takeover of the company that produces the “Mad Men” series.

In court papers, Icahn called the debt-for-equity swap an “unlawful sham transaction” and moved to block Rachesky from voting his shares.

The move by Rachesky increased his stake, second largest to Icahn’s, to 28.9 percent. The 74-year old activist’s stake shrank to 33 percent.

Rachesky’s move involved “breach of contract, unlawful tortious activity, violation of stock exchange rules, and violations of law, including federal securities laws.”

While the lawsuit filed in New York State Supreme Court yesterday grabbed headlines, an equally important battle will be waged tomorrow in Lionsgate’s British Columbia hometown where the Canadian province’s securities regulator will hold a hearing on the matter.

Icahn, with a net worth of $10.5 billion, had amassed a 38 percent stake in the publicly-traded studio when earlier this month he reached a 10-day truce with the board so they could explore a merger with MGM. Now his team alleges that the board, during the time when they failed to strike an MGM deal, also plotted to convert some of its debt into stock thereby diluting Icahn’s stake from 38 to 33 percent.

The debt-for-equity swap was accomplished by swapping the $100 million in bonds John C. Kornitzer owned that were trading under par and could be converted into stock at more than $10 a share with new bonds that could be converted into Lionsgate stock at $6.20 per share. That was close to its trading price.

Kornitzer took the swap, converted debt into stock and sold the shares immediately to Rachesky.

If it stands, Rachesky has basically blocked Icahn from taking control of the business. The question is whether Lionsgate, as it claims, gave bondholder Kornitzer new bonds so he would convert them into stock and Lionsgate would reduce its debt, or if it was all a plot to help Rachesky, who supports the company’s management.

Rachesky bought the shares when they were trading at $6.03. The stock has been rising and closed yesterday at $6.90.

Years ago Icahn and Rachesky were colleagues. They worked together from 1990-96 when Rachesky was Icahn’s chief investment adviser.

Now, despite living just 11 blocks away from each other on Fifth Avenue, they could not be further apart.

Icahn, Rachesky and Lionsgate all declined comment.