Image won the battle but lions gate says not the war.

Lions Gate Entertainment Corp.'s yearlong takeover hunt for Image Entertainment Inc. came to an end with a whimper last week--though the long-term pursuit may not be over.

After a contentious, drawn-out proxy battle, the Chatsworth licensing and DVD distribution company's board of directors successfully fended off Lions Gate's challenger slate.

Image's board slate received 56 percent of the votes cast at the Image annual shareholder's meeting earlier this month, while Lions Gate's slate garnered between 38 and 43 percent. (Votes could be split among the candidates.) Lions Gate is Image's second-largest shareholder and has an almost 20 percent stake in the company, though nearly twice that amount is held by entities or investors allied with Image.

Lion's Gate was looking to get its hands on the 3,000 titles and 250 CDs in Image's library, including the feature films "Traffic" and "Hoop Dreams" as well as lower profile fare such as the BBC's version of C.S. Lewis' "The Lion, the Witch and the Wardrobe."

Lions Gate's fortunes have been on the rise lately. Last year's Academy Award winner for best picture, "Crash," was a Lions Gate film and the studio is a significant horror genre player, with the first two films in the popular "Saw" franchise pulling in more than $250 million.

John Kirkland of Greenberg Traurig LLP, Image's outside counsel, said the distributor was gratified by the shareholders' vote.

"The company is always open to hearing any reasonable proposal," Kirkland said via phone from Africa, where he was vacationing. "For reasons I don't understand, Lions Gate decided not to raise its offer and engaged in a hostile takeover bid. It was very destructive and counterproductive."

Still, the war may not be over.

While mum on specifics, Lions Gate executives have indicated the company is not interested in being a passive, long-term shareholder, and believes the results of the vote may force Image to improve its financial performance.

Image reported a loss of $2.3 million in the first quarter of fiscal 2007, which ended June 30. And the company stock has hovered between $3 and $4 a share all year--down from a January 2005 high of $6 per share.

While Lions Gate was only able to get 43 percent of the vote at most for its slate, it notes that 80 percent of the stockholders not affiliated with either company voted for its slate.

"The company is going to evaluate all of its options. Our patience, though considerable, is finite," said a Lions Gate spokesman, who said Image needs to "focus seriously on maximizing shareholder value."

Stock valuation

Image is much smaller than Lions Gate, with a market cap of just $75 million compared to Lions Gate's $1 billion. And it presently competes with the studio only as a distributor.

The studio first offered to buy Image last fall, with a stock-based bid valued at about $90 million, or $4 a share. The bid came when Image's shares were trading around $3, down from their January 2005 high. Image rejected the stock-based offer and a subsequent cash bid last October as insufficient. There began the battle.

Image hired Lazard Freres & Co as its financial adviser to explore the company's options. Then in June, Lions Gate successfully sued Image, forcing its directors to stand for reelection together, rather than in the staggered elections which protected their majority from hostile takeover attempts. At the same time, it fielded its own slate of board nominees.

The cash offer was renewed in July before the proxy war hit its most contentious point early this fall.

The Lions Gate nominees were UCLA economist Duke Bristow; Edward Huguez of Starz Entertainment; Eric Doctorow, recently named to manage sales of the MGM DVD catalog at 20th Century Fox Home Entertainment; Joachim Kiener; Barry Perlstein; Joseph Incandela; and Jack Crosby. Bristow was the top vote-getter on the Lions Gate slate, and earned 7.9 million votes.

Image's slate--and now its board--is made up of its chief executive Martin Greenwald; Relativity Media LLC's Lynwood Spinks; David Coriat; Ira S. Epstein, an entertainment attorney at Greenberg Traurig LLP; Gary Haber; M. Trevenen Huxley, a consultant to Image digital subsidiary Egami Media; and Robert J. McCloskey, a former chief executive at Video One, a subsidiary of Image shareholder Standard Broadcasting Corp.

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