Shareholders set fate of image, Lions Gate.

Judgment Day is at hand for Chatsworth-based Image Entertainment Inc., the target of a yearlong hostile takeover bid by Lions Gate Entertainment Corp.

Specifically, it's Tuesday, when Image shareholders are to gather at the Woodland Hills Country Club to decide whether to replace the board of the video and music distributor with a slate backed by Lions Gate.

If they do oust the current leadership, it would effectively transfer control to the Santa Monica-based independent producer and distributor, which has made three buyout offers to the Image board since last fall, each of which has been rejected.

"Most of the votes will likely be cast before the meeting," said John Kirkland, the Greenberg Traurig LLP attorney who serves as Image's outside counsel.

Shareholders have been able to let their feelings be known via phone, mail or the Internet for weeks. Stockholders who attend the meeting have the option of changing their ballots, however, so both companies may send executives to make eleventh-hour pleas to shareholders.

It could be days before the results are tallied and official, but it will end a long-running feud between the two local firms. The battle has been marked by a lawsuit and accusations of partisanship, fraud and stock manipulation.

With resolution apparently days away, no one from either of the companies would make predictions on the outcome, at least for the record. But they both had plenty to say in letters sent to shareholders last month.

Lions Gate urged Image stockholders "to replace Image's current directors, whom we believe are entrenched, conflicted and not acting in your best interests."

Image CEO Martin Greenwald responded in a letter of his own, which characterized Lions Gate as "a hostile corporate raider, attempting to take control of your company without raising its inadequate bid."

Turf war

Image is much smaller than Lions Gate, and presently competes with the independent studio only as a distributor. Lions Gate's market cap is just over $1 billion, while Image is only at $75 million. Image is only beginning to produce films, while Lions Gate is well established in that realm. Last year's Academy Award for best picture, "Crash," was a Lions Gate film and the studio is a significant honor genre player. However, Image is an especially attractive target for Lions Gate for several reasons.

Image's 3,000-title film library, which includes the feature films "Traffic," "Hoop Dreams" and the BBC's "Chronicles of Namia," would fill a need for Lions Gate, which just last fall saw some revenue evaporate as its 3,000-title library of Republic films reverted to the control of Viacom Inc.'s Paramount Pictures.

An acquisition also would head off what could potentially be a future competitor. Image got a boost last week when it signed a broad content agreement for home video rights with Discovery Commerce--providing a range of nature, travel, science and military content, including all Discovery Channel programming. More significantly, however, Image signed a 10-year agreement with Relativity Media LLC this summer. Relativity, a Beverly Hills financing company that has structured more than $4 billion worth of production slates for major studios including Universal Pictures and Sony Pictures, intends to finance up to 20 wholly controlled motion pictures each year after 2007. The home video rights for those films will be granted to Image.

"This is a sea change for the company; our revenues and profits will increase by multiples," said Kirkland. "Before we were more specialty. This is a move into major mainstream features. We will be competing directly with Lion's Gate on their bread and butter stuff."

The back story

The battle began in September of 2005 when Lions Gate, after gobbling up Image shares over that summer, made an offer of $93 million in stock, or about $4 a share, for the firm. The rejection of that offer, which the Image board characterized as too low, ignited the contentiousness. The bid came when Image's shares were trading at around $3, down from a January 2005 high of $6 a share.

Lions Gate made another $4-a-share offer, although in cash, in October. That was rejected. The offer was renewed in July.

Frustrated, Lions Gate then successfully sued to force Image's directors to stand for re-election all at once, rather than in the staggered elections which protected their majority. Lions Gate fielded its own slate of nominees, setting up Tuesday's showdown.

Image's performance has been sub par: the company missed analysts' estimates in five out of the last six quarter, revenues are down from last year, and earnings have drooped from 5 cents a share a year and a half ago to a loss of 11 cents a share in June.

Image blames what it calls Lions Gate's inadequate bids for much of the trouble.

"The takeover bid has acted as a glass ceiling on our stock price," Kirkland said. "It is to Lion's Gate's advantage to have distracted the competition." Lions Gate counters that Image's stock price slide began long before the studio made an offer.

"Image's attempt to blame Lions Gate's proxy challenge for Image's poor corporate performance is one of the most disingenuous and irresponsible excuses that a company has ever given to its shareholders," said Lions Gate spokesman Peter Wilkes. "What they failed to mention is that they were also unprofitable last year in fiscal 2006 and fiscal 2004, 2003 and 2002."

Complicating issues

Each company has strategic alliances, which are affecting their relationship.

MHR Fund Management LLC, which owns more than 1 million shares of Image stock worth about $3.8 million, is Lions Gate's largest institutional shareholder with a whopping 10 million shares worth about $85.5 million.

And Lions Gate has a Relativity deal, too. Relativity is bankrolling Lions Gate's "3:10 to Yuma," a remake of a classic Western with a budget estimated at well over $50 million.

A recent report issued by proxy advisory firm Institutional Shareholder Services recommends that Image shareholders split their vote by adding just one member of Lions Gate's slate--Duke Bristow, who has experience in corporate governance--to temper the incumbent Image nominees.

The ISS report concluded that Image has indeed underperformed and is "hanging most of its hopes on the Relativity transaction and the monetization of its digital rights." But the report also says that the absence of an operational plan or strategic vision from Lion's Gate leaves too much doubt to recommend a vote for its entire slate.

BY ANNE RILEY-KATZ

Staff Reporter