Activist investor Mark Rachesky again goes toe-to-toe with mentor Icahn

March 24 When hedge fund investor Mark Rachesky faced off against Carl Icahn in a battle for Lions Gate Entertainment, he knew his adversary well.

Rachesky, a Stanford University MD who’s never practiced, had worked for Icahn for six years until 1996. Then he left to start his own company: MHR Fund Management. Master and apprentice met again in 2008, when Icahn, a relentless corporate raider, built a 9.2 percent stake in Lions Gate.

Icahn tried to force out Lions Gate’s leaders, calling them profligate spenders. Rachesky stuck by them, and together they fended off the threat with a crafty debt-for-equity swap. Icahn sued his protege, calling the transaction — in which Rachesky bought convertible bonds from another investor and immediately turned them into stock — a sham.

Icahn lost in court in November 2010, and 10 months later he agreed to sell his Lions Gate shares for $7, a dime more than the average price at which he had accumulated them. Lions Gate shares closed at $21.80 on March 1, lifted by the dystopian blockbuster film “The Hunger Games” and “Warm Bodies,” a comic zombie-human romance. MHR — Rachesky’s initials — owns 51 million of them, or 35 percent of the company.

Now Icahn, 77, and Rachesky, 53, are back at it, building stakes in struggling truck-maker Navistar International. Each has about 12 million shares. So far, there are no lawsuits.

“These guys are deal-fight junkies, and they have a taste for each other’s blood,” says Matt Harrigan, an analyst at Wunderlich Securities who follows Lions Gate.

When it comes to getting control of companies, Rachesky is like a brawler in the few-holds-barred Ultimate Fighting Championship circuit, Harrigan says.

“He’s a super-bright guy, and he’s well versed in UFC tactics in these fights,” he says.

Rachesky and Icahn are activist investors. They don’t buy a stock, dial into earnings calls and hope for the best. They take a stake and angle for control. Rachesky has succeeded in elevating himself to chairman of four corporate boards: Lions Gate; Loral Space & Communications; Telesat Holdings, a satellite communications network operator majority-owned by Loral; and Leap Wireless International.

Icahn, Rachesky and agitators like them launched 219 campaigns in 2012, a 22 percent increase from 2011 and the most since 2008, according to FactSet Research Systems.

One of the nastier fights came to a head in May, when Daniel Loeb, founder of the hedge fund Third Point, got Yahoo chief executive Scott Thompson booted by flagging discrepancies in Thompson’s résumé. In June, Bill Ackman’s Pershing Square Capital Management forced out Canadian Pacific Railway chief Fred Green. This year, he’s gunning for Herbalife, calling the nutritional supplements maker a pyramid scheme, an allegation denied by Herbalife.

Rachesky managed more than $5 billion in three funds as of late February, from offices 24 floors above West 57th Street in New York. MHR’s biggest holdings are Lions Gate and Loral, both worth about $1 billion as of March 1.

219

Icahn, Rachesky and agitators like them launched 219 investor takeover campaigns in 2012, a 22 percent increase from 2011 and the most since 2008, according to FactSet Research Systems.

$217

 

million

Rachesky’s first fund raised $217 million in 1998 and has posted an annualized return of 16 percent after fees as of Sept. 30.

$856 million

The second fund, an $856 million pool from 2003, returned 13 percent a year as of Sept. 30. Fund III, started in 2007 with $3.5 billion, has an 8 percent return.

43

MHR has completed 43 major investments in its 16-year history, and 39 have been profitable.