Moody's Investors Service says TV content is key
Moody’s Investors Service has upgraded its rating outlook on $236 million in Lionsgate debt to positive from stable.The service made the announcement Wednesday, a day after Carl Icahn sweetened his hostile offer for the mini-major to $7.50 a share from $6.50. Lionsgate stock, which had risen 10% Tuesday, gained another 7¢ to $7.21 in trading on the New York Stock Exchange. Moody’s said the rating outlook change was prompted by a combination of recent debt reduction through a $100 million debt-for-equity swap, better-than-expected operating performance, management’s continuing focus on taking risk out of the balance sheet and improving credit metrics. “While Moody’s remains cautious regarding the inherent and significant volatility of the theatrical production business and the negative cash flow in recent years, the company’s growing investment in both film and, particularly, the upfront investment in television programming is expected to generate improving operating profits and free cash flow over the next few years,” the service said. It added that the improvement will come from a more disciplined approach to film investments, some of its important TV content such as “Mad Men” entering syndication and its Epix pay cable venture reaching profitability more quickly than initially planned. On Aug. 9, Lionsgate reported a net loss of $64 million vs. profits of $36 million for its first quarter ended June 30, citing marketing costs for three wide releases, timing of TV deliveries and the underperformance of “Killers.” Moody’s said Wednesday it expects Lionsgate will return to profitability in fiscal 2011 and is confident that profits will improve in coming years. “This will be driven by management’s pursuing a disciplined film slate strategy focused on niches that have proven profitable for the company in the past, growth in TV program syndication revenues due to the popularity of such shows as ‘Weeds’ and ‘Mad Men,’ and the increasing distribution and profitability of Epix premium cable channel,” Moody’s said. Icahn’s offer is valid if Lionsgate rescinds its July 20 debt-for-equity deal with Lionsgate director Mark Rachesky or converts Rachesky’s shares into nonvoting stock. He’s challenged that deal with Canadian regulators and has also reiterated his promise to launch a proxy fight to replace the board. Icahn’s been highly critical of Lionsgate management over what he sees as excessive spending on overhead and film production. Lionsgate has contended that Icahn’s attempting to buy the mini-major for a lowball price and asserted that he’s incorrect about the company’s spending. Lionsgate has scored recent back-to-back successes with “The Last Exorcism” and “The Expendables”; they have grossed a combined $107 million at the domestic box office as of Tuesday.
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