Transaction expected to close by year's end
This article was updated at 7:20 p.m.
In a unique deal creating one of the largest film libraries in the biz, Lions Gate and Artisan Entertainment Monday buttoned up their long-discussed combo.
Canadian-based Lions Gate will pay at least $160 million in cash and assume more than $60 million in Artisan debt to acquire the Gotham film company. But the final payout could grow by $5 million or more under certain terms regarding future film performance.
Pinkslips are likely to fly soon, with a quarter or more of the combined companies’ workforce subject to layoffs.
JPMorgan is financing the transaction, a move proposed as long as two years ago but which only gelled over the past week (Daily Variety, Oct. 21).
“Lions Gate and Artisan have complementary strengths and are a superb strategic fit,” said Lions Gate CEO Jon Feltheimer, who will run the merged entity.
“I can think of no company that better complements our core business strengths and strategic vision than Lions Gate,” said Artisan CEO Amir Malin, who is expected to ankle the operations with a substantial payout. “Other than the job cuts that will happen, which I guess are part and parcel of our capitalist system, it’s a good result for everybody.”
Transaction is expected to close by year’s end.
Lions Gate agreed to give Artisan’s current owners a profit participation in 2004 releases “Dirty Dancing 2: Havana Nights” and “The Punisher” if the pics perform as well as hoped. A source close to the deal estimated the provision could mean about $5 million to Artisan’s equity partners if the films succeed, but Malin claimed an additional payout of even $15 million is possible.
“Personally, I think that’s money in the bank,” Malin said.
The Artisan investors could also get an additional substantial payout from ongoing litigation involving a 2-year-old dispute regarding some insurance-backed film productions, he added.
Financial community observers have long touted a Lions Gate-Artisan combo as the clearest means of bolstering Lions Gate’s cash flow. Similarly, they have viewed it as an obvious way for Artisan’s investment-minded owners to cash out of their holdings without attempting a potentially frustrating initial public offering.
Artisan’s strength has been its library, which together with Lions Gate additions, brings the total to a whopping 8,000-plus titles. Many are movies that Artisan doesn’t own but for which it has acquired long-term distribbing rights. Among the titles it owns or for which it has acquired distribution rights are “Total Recall,” “Terminator 2,” “Dirty Dancing,” “Basic Instinct,” and “On Golden Pond.”
Cutting $20 mil
Up to $20 million in overhead is expected to be slashed, with two-thirds of the savings through job cuts. A total financing of $350 million by JPMorgan likely will include $80 million-$90 million in production and corporate funding.
“Nothing’s been set in stone,” Feltheimer said when asked where layoffs might hit. “I wouldn’t be a good manager if I didn’t take advantage of the best-in-breed among (Artisan) executives.”
Indeed, one insider noted some of the envisioned pinkslips might fly among Lions Gate’s current workforce of just under 250; Artisan has about 200 employees. Overall, somewhere between 100-150 job cuts are being mulled.
Once the merger is completed, Lions Gate plans an annual film slate of 15-20 titles, producing half of the movies and acquiring the rest.
The company’s next few releases include “Shattered Glass,” a fallen journalist yarn starring Hayden Christensen set to unspool Friday; “The Cooler,” a drama starring William H. Macy and Alec Baldwin set for Nov. 19; and “Girl With a Pearl Earring,” a lit-adaptation starring Scarlett Johansson (“Lost in Translation”) and Colin Firth.
An investment group led by former USA films chief Scott Greenstein and movie producer Stanley Jaffe was the effective runner-up in the six-month Artisan auction with a bid north of $150 million plus debt assumption. Comics giant Marvel, which had been looking for a partner to bid on Artisan, never filed a formal offer.
Lions Gate has been courting Artisan for more than two years. Long rebuffed in those overtures, its initial bid in the Artisan auction was rejected as too low and execs were denied participation in a due-diligence phase of the process until a few weeks ago.
Lions Gate was ultimately able to prevail because of solid backing from its financial team and a couple of recent secondary stock offerings. The offerings raised almost $100 million over just a few months’ time in difficult market conditions.
Shares in the company, which maintains offices in Vancouver and Los Angeles, have risen sharply of late on signs Lions Gate would succeed in its quest for Artisan.
That in itself speaks volumes about the perceived benefits of the transaction for Lions Gate, as acquiring companies usually see their shares slump on news of pricey acquisitions.
Stock jumps 12%
The shares soared again Monday, rising 39¢, or 12%, to close at $3.66.
Artisan management is credited with cleaning up their company’s once highly leveraged balance sheet in advance of the company action.
Malin and chief operating officer Ken Schapiro are in line for payments in the single-digit millions — in addition to contract payouts and equity proceeds — for helping the auction succeed.
“The turnaround that’s been effected by Amir and Ken Schapiro and the whole Artisan management team is nothing short of remarkable,” said John Josephson of Allen & Co., which supervised the Artisan auction along with Harris Williams.
The auction dragged on longer than it might have in part due to bickering among Artisan’s current equity holders.
Those are investment firms Audax of Boston and Richland Gordon of Chicago, and Canadian broadcast group CTV, as well as a bloc of company execs. Each had a vote on selecting a winning bid, and three of the four constituencies had to agree before a victor could be named.
Artisan dates to the July 1997 acquisition by a group of private investors of Live Entertainment, a publicly traded homevideo distrib they morphed into Artisan by April 1998.
After taking the company private, the equity backers hoped to launch an Artisan IPO on the presumed success of a sequel to 1999’s breakout horror hit “The Blair Witch Project.”
But the 2000 follow-up, “Book of Shadows: Blair Witch 2,” tanked — along with the climate on Wall Street for any sort of public offering. IPO plans were shelved and Artisan investors were forced to look for a different exit strategy.
Artisan chairman Geoff Rehnert, a co-founder of Audax after exiting original Artisan backer Bain Capital, said he’s satisfied that the Lions Gate deal reps an appropriate return on investment.
“The entertainment business is a difficult and challenging one for investors, particularly outsiders, as it is fraught with risk and dominated by insiders,” Rehnert observed. “We recognize that we are fortunate to have made money in this industry for our investors.”
(Meredith Amdur in New York contributed to this report.)