Carl Icahn is threatening to sue Lions Gate Entertainment one day after the company made a defensive move that endangers the investor's long-running crusade to take over the film and television studio.

On Tuesday, Lions Gate issued new shares to its second-largest shareholder, Mark Rachesky, increasing his holdings to just under 29% from 20% as part of a complex debt-for-equity swap. The action diluted the equity of all shareholders, including Icahn, whose stake fell to just over 33% from nearly 38%.

Icahn contends the stock deal violates an agreement he and Lions Gate made for a 10-day truce that ended at midnight Monday. Although Lions Gate announced the stock deal on Tuesday, after the expiration of the agreement, Icahn and his lawyers said they are going to look at whether the company had agreed to the debt-for-equity swap with Rachesky during the detente. 

In a July 9 letter to Icahn outlining the truce, Lions Gate Vice Chairman Michael Burns said that during the 10-day period, his studio would not "issue, agree to issue or authorize or propose the issuance of any securities to ... any member of its board of directors or their affiliates." Rachesky, a former employee of Icahn's, is on Lions Gate's board.

"Not only has Lions Gate's board diluted the company's shareholders in an attempt to entrench themselves, but it has violated the agreement it made with us, which among other things prohibited Lions Gate from issuing stock during this period," said Icahn. "We intend to litigate."

A Lions Gate spokesman declined to comment.

Icahn said he also intends to litigate against Lions Gate's recently adopted "poison pill," which would make it difficult for him to accumulate more shares. The investor successfully persuaded regulators in Canada, where the company is legally based, to throw out a previous poison pill.

"We are going to challenge the poison pill again and go to court to try to get it removed," said Icahn.

On Tuesday, after the 10-day truce with Lions Gate elapsed, Icahn launched a new tender offer at $6.50 per share, 50 cents less than his previous bid to buy up the company's outstanding shares.

In an attempt to fend off Icahn's hostile takeover try, Lions Gate announced Tuesday that it had converted $100 million of its debt to equity at a price of $6.20 a share. Later  that day, Rachesky, who has been supportive of management in its battle against Icahn, disclosed in a filing that one of his investment funds had received the stock in exchange for the debt it had acquired from Kornitzer Capital Management. 

The transaction makes it more difficult for Icahn to win the majority of Lions Gate's outstanding stock or win the proxy war he is threatening to replace the company's top management and board directors.

It now appears that in order to take over Lions Gate, Icahn is banking on the courts to rule in his favor and void the deal with Rachesky.

Lions Gate stock closed down slightly Wednesday at $6.50.

-- Claudia Eller and Ben Fritz

 

Wall Street's sky-high expectations for Netflix Inc. sent its stock into a swoon after hours Wednesday as the fast-growing DVD-by-mail company failed to meet revenue expectations.

Netflix stock was down 9% in after-hours trading after it reported $520 million in revenue for the three months ending June 30. That was up 27% from the same period a year ago, but on the low end of guidance the company had provided to analysts.

The sharp drop in Netflix's stock price reflects just how big hopes for growth have become among investors. The company reported a strong 34% rise in net income to $43.5 million and added 1 million subscribers, nearly four times as many as it added in the same quarter last year. Both figures were slightly above guidance.

The fact that Netflix added more subscribers, but not more revenue, than expected may indicate that many new subscribers are opting for the company's lowest priced subscription plans, which start at $9 per month.

The continued growth of Netflix and the $1-per-night DVD kiosk company Redbox comes at the same time that DVD sales have been declining for nearly two years, though an industry group recently reported that the rate of decline shrunk significantly during the second quarter, thanks in large part to the DVD release of bestseller "Avatar."

In comments accompanying the earnings report, Netflix Chief Executive Reed Hastings said that investing profits into acquiring content for the company's Internet streaming service is a top priority.

In a small but groundbreaking deal sealed earlier this month, Netflix bought exclusive rights to films from Relativity Media for its Internet service during the time period usually reserved for pay cable. The deal put Netflix into direct competition with channels such as HBO and Showtime, a position Hastings cheered.

"Exclusives ... are a core part of the pay-TV market into which we are growing," he said. "At this point we can start to afford some major TV shows and movies on an exclusive basis and plan going forward on a mix of more-expensive content and lower-cost non-exclusive content."

Hastings also said that television shows are an important draw for Netflix's online streaming service. However, TV streaming puts the company into direct competition with Hulu's new premium subscription service. "The Hulu team is sharp and we're not going to underestimate them," Hastings said.

Last quarter, a record 61% of Netflix subscribers watched a movie or TV show online, up from 37% a year ago and 55% in the first quarter of 2010.

At the same time, Netflix shipped fewer discs to subscribers than it expected and invested some of the money it saved on postage into marketing. Going forward, however, Hastings said the company will spend those types of savings on licensing more movies and TV shows for the Internet. "If we find enough content deals where the terms make sense to us, we'll be spending lots more on streaming content," he said. "Otherwise, we can spend more on marketing."

Based on the second quarter's strong growth, Netflix substantially increased the number of subscribers it expects to have at the end of the year to between 17.7 million and 18.5 million, up from the 16.5 million to 17.3 million it predicted three months ago. It also slightly increased net income guidance to between $141 million and $156 million.

By the end of the year, Hastings said, he expects the rapid growth Netflix is currently enjoying to wane.

"This kind of rapid acceleration is unlikely to continue for long."

Netflix shares closed down slightly at $119.65 before last quarter's financial performance was announced.

-- Ben Fritz

After the coffee. Before making my dentist even richer.

Lions Gate and Ichan step back in the ring. After a ten-day truce between movie and television studio Lions Gate and investor Carl Icahn expired without any real settlement, hostilities flared up again. Icahn resumed is hostile takeover effort to buy the company at $6.50 per share, which is 50 cents less than his previous offer. Lions Gate countered with some moves of its own aimed at diluting Icahn's stake in the company while at the same time boosting the holdings of one of its key supporters. Hope all of this back-and-forth didn't keep Lions Gate brass from attending the "Mad Men" premiere Tuesday night (it's their show). The latest on the fight of the year from the Los Angeles Times.

He's cute enough but is he mean enough? With auditions for the next season around the corner, the hunt for Simon Cowell's replacement on Fox's "American Idol" goes on. The Hollywood Reporter says crooner Chris Isaak has had two meetings with the network about the job. Fox has said no decision is coming any time soon. The story also dangles a nugget about a fight between "American Idol" and Cowell's new show "The X Factor" over a piece of talent. Alas, a nugget is all we get since the piece doesn't say who the two shows are fighting over. Isaak is no stranger to television. He starred in a Showtime comedy about his offstage life a few years back.

Taking their case to Washington. As Walt Disney Co. and Time Warner Cable prepare for a potential battle over a new deal for Time Warner Cable to carry Disney's ABC stations and ESPN cable networks, both broadcasters and cable operators are making lots of noise in Washington. Cable operators want to the Federal Communications Commission to take a bigger role in overseeing these battles while broadcasters want D.C. to keep their nose out of it. Variety's Cynthia Littleton offers up a curtain raiser on the Time Warner Cable-Disney situation.

Google says government should stay out of news. Google, whose search engine is considered one of the biggest threats to the future of journalism, told the Federal Trade Commission that it should stay out of the journalism business regardless of how noble the intentions. One of Google's big fears was an idea floated by the FTC to create an antitrust exemption to let newspapers unite and form a paywall and end the free ride for not only consumers but also search engines and aggregators. More on Google's memo from Business Insider.

What about pepper? It hasn't even opened yet, but FX has already struck a deal for the cable rights to Sony Pictures' "Salt," which stars Angelina Jolie. FX has been pretty aggressive buying up movies in the past year, including "Avatar" from sister studio 20th Century Fox. Deadline has details, including word that FX also bought "Knight and Day." Good luck with that one.

Rising at Starz? Forbes sits down with Starz programmer Stephan Shelanski to discuss why the pay cable channel canceled critical darling "Party Down" and what is in the works.

Inside the Los Angeles Times: Need an old train for that scene? Check out Fillmore & Western Railway Co., which has become the place to go for all your rail needs. Warner Bros.' DC Comics wants the town, and Marvel, to know they are players too. Fear not, the cast of MTV's "Jersey Shore" has new deals. The Garden State can continue to hang its head in shame.

-- Joe Flint

Wednesday is anything can happen day, but you won't know what's happening if you don't follow me on Twitter. twitter.com/JBFlint

Lions Gate has boosted the holdings of its second-largest shareholder in order to fend off a takeover attempt by its largest.

Mark Rachesky, who previously owned nearly 20% of Lions Gate stock and has supported the Santa Monica film and television studio's management in its fight against activist investor Carl Icahn, disclosed late Tuesday that he is the recipient of 16.2 million new shares of stock issued as part of a debt-to-equity transaction that the company announced earlier in the day.

Under the complex deal, an investment fund affiliated with Rachesky's MHR Fund Management acquired Lions Gate senior notes due in 2026 and 2027 from their owner, Kornitzer Capital Management, for $105.7 million. MHR then converted the debt into 16.2 million shares of Lions Gate stock at a conversion price of $6.20 per share.

Kornitzer also owns a small amount of Lions Gate stock and has been loyal to management.

The deal substantially raised the percentage of Lions Gate stock owned by Racheksy, who sits on the company's board of directors, to nearly 29%, from just under 20%. It simultaneously diluted the stakes of other shareholders, including Icahn, whose stake fell from 38% to a little more than 33%. In a statement, MHR said the shares were "an attractive investment opportunity."

They could also represent a lifeline for Lions Gate management, boosting a friendly shareholder while helping to harm Icahn, who on Tuesday morning launched his second tender offer to buy up all of the company's outstanding stock, this time for $6.50 per share. Icahn has said that if he takes control of Lions Gate, he will replace the current management team and cut costs, focusing the studio's film efforts on distribution and not new productions. He has also said he will run a slate of nominees to take over Lions Gate's board of directors.

-- Ben Fritz

RELATED:

Icahn back at war with Lions Gate, launches new hostile takeover offer [updated]

Lions Gate stock pummeled by expiration of Icahn bid, merger talks with MGM

Lions Gate makes merger presentation to MGM creditors

Lions Gate and Icahn sign 10-day truce to work on deals

As Icahn gains ownership, Lions Gate serves up another poison pill

Carl Icahn now owns 34% of Lions Gate [updated: ups stake to 38%]

Lions Gate talking to MGM about possible merger of lions

Carl Icahn and Lions Gate now poised for proxy war

Mark Cuban passes Lions Gate stock to Carl Icahn 

Lions Gate stars in its own corporate drama

Viacom and CBS Chairman Sumner Redstone's voice mail message to Daily Beast reporter Peter Lauria trying to persuade him to give up a source is now fodder for the morning shows.

NBC's "Today," the top-rated morning news program, is having Lauria on Wednesday morning to discuss his story about the Redstone message, which became fodder for jokes around the media industry Tuesday. Lauria says Fox's "Good Day New York" is also having him on.

Here's the back story: The 87-year-old Redstone is apparently still smarting over a piece Lauria had done several weeks ago about the mogul's apparent interest in a young girls band called the Electric Barbarellas. In that story, Lauria said Redstone was pushing Viacom's MTV to make a reality show about the band.

In the message to Lauria, Redstone says he needs to find out who leaked the story, which he claims wasn't true.

"We're not going to kill him, we just want to talk to him," Redstone can be heard saying on the message. Although Redstone said the story was false, he also went out of his way to praise the television project in question. He told Lauria that the show runner involved in the Electric Barbarellas product said it was "the best show he's seen in 10 years." 

Though this might seem like a little bit of inside baseball for the typical "Today" viewer, it's not every day that a major executive calls a reporter and tries to get him to give up a source. Well, that may happen every day, but most probably don't leave evidence in the form of a message on voice mail like Redstone did.

No word on whether ABC's "Good Morning America" will also weigh in on the Redstone - Lauria battle. It seems to safe to say that CBS' "Early Show" will sit this one out.

-- Joe Flint

Photo: Viacom Chairman Sumner Redstone. Credit: Brian van der Brug / Los Angeles Times.

Dave Wilkinson steered his pickup truck along a bumpy dirt road before making a sharp turn across a train track and parking in front of three big-top tents that rise above fields of beets and garbanzo beans.

Wilkinson lowered his window to talk to a set decorator as they waited for a locomotive to reposition 14 wooden railway cars to be featured in the Fox film “Water for Elephants,” based on a book about a traveling circus struggling to survive during the Great Depression.

 “The train has become a rolling prop,’’ said Wilkinson on a recent sweltering weekday afternoon. “Last week we had tigers, an elephant and everything else on the train.”

Producers were close to wrapping a  50-day shoot, most of it along 30 miles of railway track owned by the Ventura County Transportation Commission but operated by Wilkinson’s company, Fillmore & Western Railway Co. Known to locals and tourists for its dinner trains, Thomas the Tank Engine events and pumpkin-patch rides, Fillmore & Western has developed a niche business leasing its trains to Hollywood.

The company, which owns 50 freight, passenger and commuter cars and 10 locomotives dating back to the 1880s, calls itself Home of the Movie Trains -- with some justification, if not a little Hollywood hype. Fillmore & Western’s trains, along with its bridges, trestles and stations, have been featured in more than 300 films and TV and commercial productions over the last two decades, making it the largest so-called short-run railway of its kind in Southern California, if not the country.

Projects filmed along the railway include movies such as “Seabiscuit,” “Race to Witch Mountain” and the recently released “Inception," which filmed a dream sequence involving a train suicide scene in Fillmore. "Atlas Shrugged," based on the novel by Ayn Rand that centers on a powerful railway executive, also recently spent two days filming along the railway, which has attracted several TV series such as “Criminal Minds” and “CSI.” Some projects film for a day; others, like “Water for Elephants,” stay for weeks.

Filming train wrecks and collisions is something of a specialty. One train is equipped with a giant metal rod that can “spear” an oncoming car and hold it on the track long enough for filmmakers to capture a collision scene. The rod was used to dramatic effect to film a fiery train collision with an SUV in the 2008 film “Get Smart.” The TV series “Numb3rs”  filmed a train collision in 2008 shortly before the Chatsworth Metrolink crash, prompting CBS to delay the airing of the episode.

“We couldn’t survive without the movie industry,’’ said the 61-year-old Wilkinson, who, with his cheeky jowls and bushy white mustache, could easily play the part of a railway conductor. His office is cluttered with vintage switchman signal lamps, steam gauges and a plaque on his desk that identifies him as “rail baron.”

The family-run company, which employs 35 people including Wilkinson’s wife, Tresa -- a co-owner -- and a  son and sister-in-law, generates about $3 million a year in revenue, about half of it from film-related leases. A big movie like “Water for Elephants” for example, will generate about $450,000 in revenue, but about 90% of that be eaten up by costs of operating trains, replacing parts and paying for fuel and oil, Wilkinson says.

“It costs a lot to run a railway,’’ he says.”These aren’t cheap machines.”

Despite the low profit margin, the business is a perfect marriage of Wilkinson’s twin passions: movies and trains. For most of his career, the Ojai resident worked as film projection technician for Mann Theatres in Ventura County.  When he wasn’t fixing projectors, Wilkinson found himself helping out the owners of Short Line Enterprises, which bought and sold trains used in the film industry. Wilkinson left his day job at Mann and in 1996 bought the company, operating under the Fillmore & Western name, and soon establishing it as a go-to location for filming.

Aside from attending a few trade shows, Wilkinson relied mostly on word-of-mouth referrals to expand the business and expand its fleet of trains, which include fully operational 1920s Pullman passenger trains and an 1891 Porter steam engine that was once used to haul lumber in Oregon.

Kevin Halloran, executive producer for “Water for Elephants,” had no doubt where he would shoot most of the film, which depicts a period when circuses traveled the country by train. He knew the site from his days as a location manager on the 1993 Nicolas Cage thriller “Red Rock West,” which also used the private railway.

“There really is only one place in Southern California where you could film this,’’ Halloran said. “If we didn’t have this here, we wouldn’t be shooting the movie in California.”

-- Richard Verrier

Photo: Dave Wilkinson, co-owner of Fillmore & Western Railway, which leases railroad cars to the film industry, stands near a railroad car being lifted by crane for transport to a studio for filming of "Water for Elephants."  Credit: Anne Cusack / Los Angeles Times

READ MORE "ON LOCATION" COVERAGE:

On-location filming rebounds in L.A. 

"Happy Cow"bill aims to keep commercials in state

Griffith Park: location managers' paradise

Hollywood has Georgia on its mind

Independent filmmakers opens a window on filmmaking process

"Transformers" takes over L.A.'s streets

Universal Studios backlot gets a makeover

Captain America will be filmed in...London?

Tax-credit brings Steve Carell's new rom-com to L.A.

Stars stay home: Hanks, Roberts, Sandler poised to shoot in L.A.

Serbia wants movies: "We're 15% cheaper than Romania"

[Update, 3 p.m.: Lions Gate responded to Icahn's new tender offer on Tuesday afternoon by converting $100 million of its debt to equity at a price of $6.20 per share.

The move creates 16.2 million new shares of Lions Gate stock and dilutes Icahn's stake in the company to a little more than 33% from 38%. The activist investor now needs to acquire more shares in order to take over Lions Gate.

However, the action also dilutes other Lions Gate shareholders, including those who have been supportive of management.

Icahn could not be reached for comment on this latest development.]

Peace didn't last long. Activist investor Carl Icahn has launched a new hostile takeover offer for film and television studio Lions Gate Entertainment at $6.50 per share, ending a 10-day détente in which the two sides ceased hostilities to discuss merger and acquisition opportunities for the company.

Icahn is already Santa Monica-based Lions Gate's largest stockholder, with 38% of the company, due to shares accumulated in a previous $7-per-share tender, which expired June 30.

His new offer positions him to potentially seize control of the company, which has seen its stock price drop to close to $6 since Icahn's bid expired. In morning trading, the stock rose to $6.46 on news of Icahn's latest bid.

Investors also have seemed wary of news that Lions Gate is in talks about a potential merger with troubled film studio Metro-Goldwyn-Mayer. Icahn was kept informed of such discussions during the 10-day truce and apparently decided he did not want to support such a move by the company's management.

Lions Gate would not be able to merge with MGM or make any other major strategic transactions without the support of its largest shareholder.

In a statement that accompanied the new tender, Icahn's investment firm said, "While certain discussions regarding acquisition opportunities might continue in the future, the Icahn Group determined that there were no immediate opportunities that would merit extension of the 10-day standstill period."

Icahn, a longtime critic of Lions Gate Chief Executive Jon Feltheimer and Vice Chairman Michael Burns for corporate spending that he claims is too high, also has renewed his call to wage a proxy war and take over the studio's board of directors. "The Icahn Group intends to seek to replace all or the lion's share of Lions Gate's board of directors with the Icahn Group's nominees," the statement said.

Icahn said his bid was contingent on Lions Gate not entering into any material transactions, such as a deal with MGM, and an end to the company's recently adopted "poison pill," which would block him from accumulating more shares. The investor successfully persuaded regulators in Canada, where Lions Gate is legally domiciled, to strike down a previous poison pill adopted by the company.

In a statement, the Lions Gate's board said that, consistent with its fiduciary duty, it would review Icahn's new offer and soon make a recommendation to shareholders. Given that it previously rejected Icahn's $7-per-share offer as fnancially inadequate, it's likely the board will do the same with his new tender, which expires Aug. 25.

[Update, 5:49 p.m.: For more, see the story on the latest in the Lions Gate - Icahn feud in tomorrow's Times.]

-- Ben Fritz and Claudia Eller

Related:

Lions Gate stock pummeled by expiration of Icahn bid, merger talks with MGM

Lions Gate makes merger presentation to MGM creditors

Lions Gate and Icahn sign 10-day truce to work on deals

As Icahn gains ownership, Lions Gate serves up another poison pill

Carl Icahn now owns 34% of Lions Gate [updated: ups stake to 38%]

Lions Gate talking to MGM about possible merger of lions

Carl Icahn and Lions Gate now poised for proxy war

Mark Cuban passes Lions Gate stock to Carl Icahn 

Lions Gate stars in its own corporate drama

After the coffee. Before getting swallowed up in "Mad Men" hype.

Forget the Mel Gibson tapes. Check out the Sumner Redstone tape! Several weeks ago, Daily Beast reporter Peter Lauria wrote a piece suggesting that Viacom Chairman Sumner Redstone had developed a keen interest in a young female singer and was pressuring Viacom's MTV to put a show on about her band. Now Redstone is trying to find out from Lauria who told him that story. He left a message on Lauria's voice mail seeking the name of the leaker, which Lauria then wrote about for the Daily Beast. "We're not going to hurt this guy," Redstone said on the call about the leaker. Though Redstone's message does not even begin to approach the level of anger that Mel Gibson can hit without even trying, it still makes for good listening. Lauria promises he won't give up the name of his source. While Redstone said he won't hurt whoever babbled, Lauria might want to get a food taster after posting Redstone's message.

Stay of execution."Damages," the ratings-challenged legal drama that critics loved is moving from the FX cable network to satellite broadcaster DirecTV's 101 Network. For DirecTV, landing "Damages" is something of a vanity play. It is trying to differentiate itself from other pay TV distributors with original content. For Sony Pictures Television, the show's producer, getting another 20 new episodes ordered will help it make money back on the expensive show, which stars Glenn Close and Rose Byrne. New episodes of "Damages" won't appear on the 101 Network until late next year at the earliest. Still, although fans of the show are rejoicing, accountants might be shaking their heads. FX struggled to  make ends meet with "Damages" and its channel is available to about 90 million cable and satellite subscribers. The 101 Network is only available to about 18.6 million DirecTV subscribers. Analysis of the deal from the Los Angeles Times. 

Keep away from my windows. In an opinion piece in the Hollywood Reporter, Gregory Marcus, president of Marcus Theatres Corp., tries to make the case for Hollywood to quit shortening the so-called windows between a movie's theatrical run and its availability on DVD and on pay TV. Writes Marcus: "I just saw Johnny Depp at the grocery store. Dressed as the Mad Hatter, he was in the Redbox machine available for $1. All I could think was what a shame it was that this wonderful movie was being so terribly devalued." Marcus compares the shortening of windows to a frog being cooked. A frog, he reminds us, can't sense subtle changes of temperature and fries before realizing its time to jump. "Studio execs, be careful before you cook us all, yourselves included," Marcus warns.

Career advice: IndieWire's Anne Thompson takes a look at the roller coaster that is Nicholas Cage's career and suggests less exposure. Cage used to bounce effortlessly between family friendly adventure, hardcore action and the occasional adult drama to hone his acting chops. Now, with the disappointing results for Jerry Bruckheimer's "The Sorcerer's Apprentice," Cage may need to reassess his career strategy of saying yes to every role that comes along. Alas, if reports of Cage's personal spending habits are accurate, he probably has to say yes to everything. Maybe he should say yes to shopaholics anonymous. Meanwhile, Hot Blog isn't buying all the stories suggesting Bruckheimer may be past his prime.

Oh Canada. The broadcast networks are reaching out to our neighbors to the north for programming this summer. New shows on CBS, ABC and the CW are all Canadian imports. This is not a new trend, it actually started a few years ago. Be nice if one of the networks picked up old episodes of "Durham County," a great crime drama that the little-watched ION acquired last year. More on the trend from the New York Times.

Writing's on the wall. Variety studies the current state of writers in television and notes that deal-making is on the rise, but nowhere near the 1990s boom when anyone who may have brought a cup of coffee to a producer on "Seinfeld" got a seven figure deal. Also, many of today's writing deals are not just for development. Studios are actually putting writers they pay money for to work on current shows they did not develop. Can you hear the sarcasm in my voice as I type this? Perhaps this quote from ICM agent Chris von Goetz will make it clearer: "The good news is deals are getting done, but it's not quite the old days, where people could make a deal and sit around and get paid." Yeah, those were the good old days. Money for nothing and the chicks for free.

Speaking of big writing deals.There are still some big paydays for writers, as evidenced by 20th Century Fox Television's new deal it is working on with with "Glee" co-creator Ryan Murphy. According to Deadline Hollywood's Nellie Andreeva, it is a four-year, $24-million pact with lots of other perks and incentives as well. Of course, "Glee" has turned into a hit for Fox and the studio, which recently sold reruns of the show to Oxygen. 

Who gets custody of Sofia Vergara? Steve Levitan and Christopher Lloyd, the writing and producing partnership behind ABC's "Modern Family" are splitting up, according to Vulture. The report says it is an amicable split, but then again doesn't everyone who gets divorced say that? They both will remain involved in the show, which should make for some interesting drama.

Inside the Los Angeles Times: Patrick Goldstein on how Warner Bros. nurtures relationships. Claudia Eller on how Universal found success with "Despicable Me."

-- Joe Flint

Follow me on Twitter. I'm not going anywhere: twitter.com/JBFlint

Wonder what Patty Hewes would make of this deal.

In a noteworthy marriage of business interests, Sony Pictures Television and satellite broadcaster DirecTV have reached an agreement that will stay the execution of "Damages," the low-rated but critically acclaimed legal drama starring Glenn Close as cutthroat lawyer Patty Hewes. The show, which had run on News Corp.'s FX cable channel for the last three years and garnered several Emmy Awards, will move to DirecTV's 101 Network.

However, if you are a "Damages" fan but do not have DirecTV, you don't have to subscribe just yet. New episodes won't start airing until late 2011 -- at the earliest. The 101 Network will have reruns of the first three seasons of "Damages" starting next year.

For DirecTV, getting "Damages" is something of a vanity play. FX struggled to justify keeping the show alive, given its small audience (even by cable standards). Last season the show averaged about 1.4 million viewers. Despite winning accolades and thousands of fervent fans, it could not muster large enough ratings to be profitable for the two companies.

It is unlikely that "Damages" on DirecTV will come anywhere near the ratings it was getting on FX. The 101 Network is available only in DirecTV's roughly 18.6 million homes; FX is found in more than 90 million. Furthermore, DirecTV does not have commercials, only sponsorships.

But landing the show for the 101 Network does give DirecTV a marketing hook. Two years ago, the El Segundo-based company entered into an unusual relationship with NBC Universal to run another acclaimed drama, "Friday Night Lights," network. For two seasons, "Friday Night Lights" has shined on DirecTV several months before running on the nationwide NBC broadcast network. 

"Damages" costs more than $2 million an episode to produce. Neither Glenn Close nor her costar Rose Byrne are taking pay cuts as part of DirecTV's deal, a person close to the show said.

As was the case when NBC's drama "Southland" shifted to the cable network TNT, look for a smaller cast and fewer high-profile guest stars when "Damages" returns with new episodes. That would lower some costs, but DirecTV probably will still shell out more than $1 million per episode. DirecTV's agreeing to also buy reruns probably helped Sony deal with swallowing the somewhat smaller license fee.

DirecTV would not comment on the terms of the agreement, but a senior executive said the deal makes sense for the company.

"We’re very comfortable with this," said Executive Vice President Derek Chang.

Chang said he does not consider acquiring "Damages" a loss-leader type deal for the 101 Network.

"There are other ways we justify doing things like this," he said. "It's really about extending and investing in a product you feel good about bringing your customers."

For Sony, DirecTV's involvement mitigates any damages from FX's decision not to continue with the show. With DirecTV committing to an additional 20 episodes of the program, Sony can continue to distribute the show to its foreign buyers. And the deal means that eventually, Sony could sell the show in syndication.  Without  four seasons of completed episodes, other U.S. cable channels would have had little appetite to buy syndicated reruns.

Though FX will no longer be home for "Damages," it will still have a piece of the action. Knowledgeable people say FX Productions will continue to receive a producing credit but has relinquished its financial participation in the show.  

-- Meg James and Joe Flint  

Photo: Rose Byrne and Glenn Close in "Damages." Credit: Craig Blankenhorne / FX

Lions Gate Entertainment stock has been taking a beating this month after the expiration of Carl Icahn's $7-per-share hostile tender offer and because of the uncertain state of the studio's merger talks with Metro-Goldwyn-Mayer.

Shares closed at $7.15 on July 1, the day after the activist investor's bid expired and he said he would not extend his offer or launch a new one. Since then, the stock's value tumbled 15%, closing at $6.03 on Monday.

On July 9, Icahn and Lions Gate, who have been feuding for more than year over control of the Santa Monica-based movie and TV studio, signed a 10-day truce during which they said they would discuss merger-and-acquisition opportunities for the company. On July 13, Lions Gate management made a merger presentation to a steering committee of MGM debt holders.

Both events were followed by sharp drops in Lions Gate's stock value the next day.

“The stock was impacted when it became clear that Icahn won’t be buying more shares or doing anything else to enhance his equity stake,” said Jeffrey Logsdon, an analyst at BMO Capital. “MGM has also been a mystery quotient. There’s no information as to how it would be done....Markets typically don’t like that level of uncertainty.”

In addition,  investors may not be warm to the idea of an MGM merger given the falling value of film libraries amid a decline in DVD sales.

"There's a weariness because the library business is in decline, so doubling down [on one] may not be wise," said David Bank, an analyst at RBC Capital.

Now Wall Street is waiting to learn whether Lions Gate and Icahn, its largest shareholder at 38%, will extend their detente (which expires Monday night) and continue exploring strategic transactions for the company. If their truce ends, then Lions Gate would probably not be able to pursue a deal with MGM or any other potential merger or acquisition target because Icahn's stake gives him veto power over such decisions.

In addition, under the terms of their 10-day agreement, Lions Gate would have to disclose all non-public information that it had shared with Icahn so that the investor could go forward with his long promised proxy war to take control of the board of directors. That would also enable Icahn to launch another tender offer, which he has publicly said he would not do.

Lions Gate stock began to rise in February, the month that Icahn first said he would launch a tender offer for the company's stock at $6 per share, which he later increased to $7. Since then it has gone from a low of $4.85 to a high of $7.27 in late June, a few days before his offer expired.

The studio's proposal to merge with MGM, which was done with Icahn's involvement, is one of several scenarios under consideration by the debtors who are determining MGM's future. Also on the table is a bid by Spyglass Entertainment for its chief executives to take over management, and another for MGM to merge with "Twilight" studio Summit Entertainment.

-- Ben Fritz and Claudia Eller

Stock chart credit: Yahoo! Finance.