Lionsgate has returned fire in its ongoing battle with investor Carl Icahn. The company on Friday issued a letter to shareholders addressing some of Icahn's criticisms of the company's performance and management decisions.
Here is the complete letter:
June 11, 2010
Dear Fellow Lionsgate Shareholder:
We’d like to provide an update on Lionsgate’s businesses and thank you for your continued support of the Company. We’re coming off a great fiscal 2010, and right now we’re more energized than ever:
· Our library achieved its best historical performance ever in fiscal 2010. As you know, our library is one of our most important assets, and in fiscal 2010 it generated:
o $323 million in revenues; and
o Approximately $110 million in cash flow.
We are pleased that our library revenues were up $44 million and cash flow up approximately $15 million, considering the difficult retail environment.
Our library performance also contributed meaningfully to our adjusted EBITDA of $128.5 million in fiscal 2010, which was 70% higher than our initial forecast.
Lionsgate remains the distributor of choice for many third-party catalogues who know the value we place on libraries in a world of abundant and increasing opportunities to monetize them. In fact, we recently licensed 139 of our theatrical films, including Precious, Crash, Monster’s Ball and the Saw franchise, to Rainbow Media’s IFC, Sundance, AMC and WE channels. We also announced an agreement to distribute the upcoming theatrical titles of Newmarket Films and its 250-title library, bringing the size of our library to nearly 13,000 titles.
· Our home entertainment business remains strong. By focusing on the growth of Blu-ray and on-demand platforms and genres that outperform the broader industry, Lionsgate’s home entertainment business has grown to a more than 7% market share and is an industry leader in box office-to-DVD revenue conversion rate.
Our higher box office-to-DVD conversion rate results from releasing titles in our sweet spot (e.g., action, horror and prestige), as well as strong brand management. The TV-to-DVD business, which didn’t even exist a few years ago, remains a robust part of the packaged media landscape. We expect Weeds and Mad Men to each generate over $100 million from home entertainment sales alone on an ultimate basis.
· Our TV business has one of the highest success rates in the industry from pilot to full series pickup. Lionsgate is one of the most important syndicators of product in the TV marketplace today, and our TV business continued its impressive growth performance with:
o Increased revenues from approximately $220 million in fiscal 2009 to $351 million in fiscal 2010; and
o Growth at a 40% CAGR over the past 11 years. The television business contributed over $39 million in profitability in fiscal 2010 before overhead.
We currently have 15 shows on the air, in production and syndication and have become the number one independent supplier of scripted programming to the cable networks.
We just recently finished shooting our latest pilot, Running Wilde, in Vancouver, British Columbia, and we’re pleased to report that it was picked up by Fox Broadcasting. This series joins our pipeline of shows that includes Mad Men, Weeds, Nurse Jackie and Blue Mountain State, which have all been renewed for new seasons.
On the syndication side, we’re excited about the sitcom Are We There Yet?, and pleased by the very good ratings for the show’s initial episodes last week. Our other new sitcom, Big Lake, which is just finishing production, is expected to air on Comedy Central later this summer. We also have all U.S. syndication rights to the ITV produced hit prime time show Hell’s Kitchen, now airing on Fox. These new shows join our six long-running strips House of Payne, Meet The Browns, The Wendy Williams Show, South Park, Family Feud and True Hollywood Story, along with the Discovery show Deadliest Catch.
We achieved this broad portfolio with less than $10 million of overhead.
· We have the beginnings of a tremendous channel platform:
o EPIX is continuing its strong momentum, signing six carriage deals overall (Verizon, Cox, Charter, Mediacom, NCTC and DISH), including five deals in the past three months. EPIX is now available in nearly 30 million homes and on track to be cash flow positive in 2011.
o TV Guide Network is showing strong momentum on both the content and distribution sides of the business. We will air three full strips in the fall (Weeds, Curb Your Enthusiasm and Ugly Betty), and we have secured multiyear carriage extensions with Comcast and Charter. Curb Your Enthusiasm debuted to 1.2 million viewers last week, a triple-digit ratings increase over the comparable time period last year.
o Kix and Thrill are two new action and thriller channels that have launched in Hong Kong, Singapore and Indonesia under the Tiger Gate brand, our joint venture with Saban Capital, and they will be rolling out across additional key territories in the coming year.
· We’ve built a diversified portfolio of businesses and our feature films continue to be the main driver. We have grown our pipeline from 10 films last year to an expected 12-13 films this year.
Our first three films of fiscal 2011 have already grossed $128 million combined at the North American box office and two of the three have been solidly profitable. We have achieved profitability on nine of our last 14 films, which is consistent with our track record of approximately 70% profitability for our film releases over the past 10 years.
We expect to generate a running rate of 13 to 14 films per year from our diversified portfolio of produced, acquired and co-financed films, and these slates will each be capable of delivering $125 to $150 million in ultimate profitability annually.
In addition, we recently announced that, in conjunction with the Media Development Authority (MDA) of Singapore and Saban Capital, we will make several Asian-language films to support the Tiger Gate platform.
· Our plan is working, our business is on track and we expect to continue to build our world class media platform.
Over the past 10 years, Lionsgate has grown from a little independent studio distributing primarily art house films into a nearly $1.7 billion diversified global entertainment corporation. While we have tremendous value built up in our library, our backlog and our franchises, we remain, first and foremost, a growth stock. As evidence of the strength of our business, during this period:
o Revenues have increased eightfold;
o Theatrical box office market share has improved tenfold;
o Our library of titles is up 15 times over; and
o Television revenues have grown by a factor of 40 since 1999.
We have achieved this growth while continuing to maintain our emphasis on cost discipline in our overhead. In fact, Lionsgate was cited this past May as the most efficient company in the entertainment industry measured by revenue per employee. We currently average more than $2.0 million in revenue per employee, which is 35% higher than the next highest ranking company in the media and entertainment space.
We appreciate the continued support you have shown to date. Your clear rejection of the Icahn Group’s offer underscores your belief in the offer’s inadequacy and its failure to reflect the value of your Lionsgate investment.
As we have said before, we believe the Company’s interests are best served by executing our business strategy and unlocking the value inherent in Lionsgate for the benefit of shareholders. Our fiscal 2010 results reflect that Lionsgate is a company poised to deliver exceptional value to our shareholders from the portfolio of assets we have been building.
As you may know, there will be a 10 business day subsequent offering period following the expiration of the offer on June 16, 2010 at 8:00 pm ET. Shareholders can wait to tender their shares until the beginning of the subsequent offering period, when the Icahn Group will announce the results of the tender offer. We believe that with this provision in place, shareholders will have better insight into the potential consequences of the offer and, as a result, should not feel pressured to take action before the subsequent offering period. However, it is important to note that shareholders who have already tendered will NOT be able to withdraw their shares during this subsequent offering period. Shareholders should therefore withdraw any shares already tendered in order to maximize their flexibility.
The Board recommends that shareholders NOT tender their shares into the Icahn Group’s offer now or during the subsequent offering period.
If you have any questions or require assistance withdrawing your shares, please call MacKenzie Partners at (800) 322-2885.
We look forward to our August release of The Expendables and the rest of the upcoming films on our exciting fiscal 2011 slate, and we are continuing to build our momentum throughout our business. We sincerely appreciate your continued support and confidence.
Jon Feltheimer Michael Burns
Co-Chairman and Chief Executive Officer Vice Chairman