Last of the red hot indies

Lions Gate had a boffo year; how long until some conglom proposes marriage?

For years, rumors have swirled around Lions Gate Films.

It was about to be swallowed up. It was about to swallow another company. There was too little cash flow. There was too much debt.

Yet now it’s Lions Gate’s turn to take a bow: It’s the last indie standing. A self-sustaining company with a library that, some estimate, throws off $250 million a year in annual revenue, Lions Gate has stalwartly survived its internal crises and is setting forth a substantial program of films and TV shows.

However, success has done nothing to slow the rumor mill; it’s only changed the tenor. Now, the question is: How long before a content-hungry multinational takes the Lions Gate acquisition bait?

“We’re the girl in the bar at 2 a.m. with the biggest film library,” says Lions Gate Entertainment vice chairman Michael Burns.

Lions Gate has never been the most glamorous of indie studios. While competitors like Miramax, Focus Features, Newmarket and Fox Searchlight made their mark with splashy P&A expenditures and Oscar campaigns, Lions Gate has focused on a frugal release slate, heavy on genre titles, while amassing a vast home video library, numbering about 8,000 titles.

That strategy could pay off if, as insiders predict, it’s gobbled up by a conglom in the next 12 to 18 months.

Both Burns and CEO Jon Feltheimer deny that a sale is their immediate goal, and why should it be?

Founded in September 1997, when Lions Gate Entertainment Corp. purchased Canadian distrib Cinepix Film Properties, the company has outlasted virtually all of its competitors.

While Lions Gate acquired Artisan Entertainment and Trimark Pictures, October Films became USA Films before it became Focus Features, a division of NBC Universal. Others, like Shooting Gallery, simply dissolved.

In such a landscape, calling Lions Gate the best-run indie company would damn it with faint praise; it’s the only significant one.

However, its principals believe that Lions Gate is more than a sexy librarian.

“It would be a shame and a waste for someone to acquire us for the successes and not for the culture,” says Feltheimer.

The company this year saw high-return hits at the box office like “Fahrenheit 9/11” (which it released in conjunction with IFC Films and Bob and Harvey Weinstein), “Open Water” and “Saw.”

However, home entertainment prexy Steve Beeks estimates that two-thirds of company revenue comes from video. The $160 million purchase of Artisan last year instantly made Lions Gate a major player in the sell-through video business, thanks to Artisan’s 6,000-title library. Lions Gate now has a 6% market share in the family entertainment market as well as key relationships at Best Buy and Wal-Mart.

For the first time, the company is flush with cash. With a move from the American to the New York stock exchange, it is closely tracked and boasts a record share price.

Some profit-taking by its top execs has followed, fueling chatter that they’re ready to sell out. Last month, Feltheimer sold 1.2 million shares for $14 million; Burns sold just under 1 million shares for about $11 million.

Analysts cite Lions Gate as a potential acquisition for a number of congloms, including Viacom, Disney, Time Warner and Fox, as well as Toshiba and Comcast.

Earlier this year, Lions Gate teamed with TW and private equity firm Kohlberg Kravis Roberts as a would-be buyer for MGM. That arrangement was scotched by the arrival of Sony, which presented a simpler investment structure more attractive to MGM.

Robert Routh, managing director of equity research at industry analyst Jefferies &Co., dismisses the idea of a swift Lions Gate sale.

“Michael Burns still holds 2.5 million shares,” he says. “They’re playing with their winnings. They didn’t have winnings for five years.”

It’s a culture of targeted thrift. Burns collects an annual salary of $1.27 million, but his office is smaller than that of a midlevel agent. He estimates 90% of his business travel is booked in coach, with upgrades coming through credit-card bonuses or the pit-bull efforts of his assistant.

A year ago, Lions Gate slashed 150 employees the day after closing the Artisan merger. Since then, headcount has remained steady at about 300.

“Studios have two of everything,” Burns says. “Feltheimer calls it the ‘Noah’s Ark Effect.’ ”

Lions Gate hasn’t changed a stick of furniture since it moved into Artisan’s former offices in Santa Monica last year.

Decorating the corridors is a selection of movie-lobby standees that juxtapose grisly blockbuster “Saw” with “Care Bears: Journey to Joke-a-lot.”

According to Burns, that’s a fair representation of the company he and Feltheimer set out to create.

“In the position paper we presented to investors five years ago, we described a situation that was remarkably like this,” he says.

Feltheimer says the company is “aggressively examining the branded segment business,” which means he hopes to launch a suite of digital channels devoted to genres such as horror and family films. Feltheimer confirmed that he’s in talks with an exec to oversee that operation.

Thrift also means not throwing good money after films that aren’t as good as they might have liked.

“We’re doing six films right now — will they be theatricals?” says acquisitions and co-production president Peter Block. “Some will be, but right now I couldn’t tell you which ones.”

Block sees high potential in pics like “Five Fingers,” which stars Laurence Fishburne and Ryan Phillippe, and “Akeelah and the Bee,” which also stars Fishburne.

Even the $1.2 million “Saw,” which has grossed $55 million and launched a nine-pic deal with producers Twisted Pictures as well as a sequel pegged to next Halloween, was once considered a direct-to-video candidate.

Block says that Lions Gate got involved with “Saw” in June 2003, months before the film was on anyone’s radar — including some people at his own company.

“It was underground,” he says. “You don’t want to get expectations too high. I had the blessing to do it because it fit the model. The risk was manageable.”

Much of that task falls to production president Mike Paseornek, who looks for bargains wherever he can find them. “We work wherever is the most bang for the buck,” he says.

Often, that means U.S. locations. Don Roos’ “Happy Endings” was shot in Los Angeles, “Diary of a Mad Black Woman” in Atlanta and “The Cookout” in New York. He also cuts deals on everything from film stock to editing suites.

Lions Gate also doesn’t let niceties, like a star’s quote, get in the way.

“If it’s a passion project, we focus on the backend,” says Paseornek, “Genre films, we pay upfront.”

However, Lions Gate’s most profitable film of the year was neither “Saw” nor “Fahrenheit” (which is expected to bring about $10 million in profit), but the Sundance pickup “Open Water.” Worldwide rights cost $2 million; it earned $30.5 million in North America in wide release.

Lions Gate distribution president Tom Ortenberg says he expects to release at least three titles on more than 1,000 screens next year. These include horror films “Alone in the Dark” from Uwe Boll, Rob Zombie’s “The Devil’s Rejects” and French-language slasher “High Tension,” which Lions Gate picked up at the 2003 Toronto Film Festival.

“We’ll probably do four or five wide releases next year,” he says. He’s also developing a raft of sequels, including “The Punisher 2,” “Cabin Fever 2,” “American Psycho III” (which “could be theatrical”) and a potential revival of the “Blair Witch” franchise.

However, even at a company that thrives on thrift, not everything is recyclable.

Says Ortenberg: “I think there have been enough ‘Dirty Dancings’ in the world.”

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