Cash and stock deal structured as leveraged buyout

Wall Street mulls deal’s benefits | Analysis: Lionsgate’s done deal surprises observers

Summit Entertainment and Lionsgate have agreed to walk down the aisle, combining the town’s leading minimajors in a complex cash and stock deal worth $412.5 million.

The completed deal, which has been expected to close for the past week, was announced at the close of the market Friday. Lionsgate co-chairman and CEO Jon Feltheimer and vice chairman Michael Burns told Variety that final details were worked out at 3 a.m. PST on Friday. The deal is structured as a leveraged buyout with the majority of the purchase price funded with cash on the balance sheet at Summit.

“This transaction continues Lionsgate’s long-term growth strategy of building a diversified worldwide media company through a combination of disciplined, accretive strategic acquisitions and organic growth while maintaining a solid balance sheet,” said Feltheimer and Burns in a joint statement. “We are uniting two powerful entertainment brands, bringing together two world-class feature film franchises to establish a commanding position in the young adult market, strengthening our global distribution infrastructure and creating a scalable platform that will result in significant and accretive financial benefits to Lionsgate shareholders.”

The Lionsgate board approved the deal Tuesday, according to Feltheimer.

Summit co-chairmen Rob Friedman and Patrick Wachsberger said in a statement, “We believe that the combined entity will be even greater than the sum of its parts.”

The announcement said both Lionsgate and Summit will continue to operate as distinct brands — both “active in the production and distribution of films.” But it did not directly address the status of Friedman and Wachsberger. Speculation about their future has varied widely, ranging from the two taking the reins of Lionsgate’s motion picture operations from current topper Joe Drake to Freidman and Wachsberger departing the combined company.

Friedman and Wachsberger met with Summit staff Friday afternoon after the announcement to brief them on the deal and emphasize that the employees should focus on the ongoing business.

“We told them that we’re going to continue to go about their business because we have a lot of films coming,” Friedman told Variety. “We are going to continue to operate Summit day to day and work with Lionsgate on a seamless transition. We are not taking our foot off the pedal.”

As to the question of their future employment, Friedman said he and Wachsberger both working under employement contracts with Summit. Feltheimer told Variety that he expects specifics on management structure to be disclosed within the next week.

The announcement also didn’t address the issue of whether there will be layoffs but Feltheimer said, “There’s no question that there will be some consolidation but for many employees, this will be a tremendous opportunity.”

The merger will significantly beef up Lionsgate’s foreign sales operations. Wachsberger said he expects Summit’s foreign sales division to be operating as usual at the upcoming Berlin and Cannes film markets.

International distribs with output deals began receiving calls from Lionsgate and Summit on Friday that they would continue to receive pics via those agreements through 2012.

Though Lionsgate is headquartered in Vancouver, most of its operations are in Santa Monica, a few blocks from the Summit offices. Summit has about 150 employees, Lionsgate about 500.

Wachsberger indicated that there’s plenty of familiarity between the two companies. “The people at Summit know the people at Lionsgate,” Wachsberger noted.

Lionsgate said transaction is expected to be “significantly accretive” in Lionsgate’s 2013 fiscal year beginning April 1.

Beyond the Summit cash, the rest of the transaction was funded with $55 million of existing Lionsgate cash, $45 million of cash received from a newly issued series of Lionsgate convertible notes, $50 million of Lionsgate common stock and an additional $20 million of cash or stock to be issued at Lionsgate’s option within 60 days.

The stock portion of the deal gives Summit owners an ownership stake in Lionsgate of about 5%.

Summit’s existing term loan was refinanced with a $500 million debt facility, secured by the collateral of the Summit assets. The loan matures in 2016 but Lionsgate said it “anticipates repaying the loan well before the maturity date, due to the significant cash flow the business is expected to generate.”

Burns and Friendman both told Variety that the fourth and fifth “Twilight” films and the “Hunger Games” films are expected to generate large amounts of cash to pay down that loan prior to 2016.

The mini-majors have been negotiating exclusively with each other in recent weeks as execs sorted through the complexity of the transaction. Miramax owner Colony Capital made an offer and had been in negotiations during November and December before dropping out.

The merged entity would have more firepower in a market where the majors have scaled back on mid-budget films in favor of tentpoles and franchises — creating an opportunity for sizable indies to fill that gap.

The union brings the “Twilight” franchise under the same roof as “The Hunger Games,” which Lionsgate is banking on to revitalize its film slate. The last of the “Twilight” pics, “The Twilight Saga: Breaking Dawn — Part 2,” due to open Nov. 16, is likely to take in as much as $1 billion at the worldwide box office.

The first installment of what Lionsgate hopes will be a franchise based on the popular book series, “Hunger Games” opens March 23. The trailer for the pic got a boost with its target aud in running with Summit’s “Twilight Saga: Breaking Dawn — Part 1,” which did boffo business following its Nov. 20 domestic bow.

Since 2007, Summit co-chairs Friedman and Wachsberger have transformed Summit from a foreign sales company into a full-service production and distribution studio on the back of its successful gamble on film adaptations of Stephenie Meyer’s bestselling series of vampire-werewolf novels.

In April 2007, Summit arranged a $1 billion financing deal — a transaction that would not have been possible a few months later as the financial markets began melting down.

Last March, Summit closed a $750 million financing deal — a $550 million term loan and a $200 million revolving line of credit — that allowed the company to unshackle itself from some of its debt, increase feature production and fund day-to-day operations. It also paid a cash distribution to its largest investors, including Friedman, Wachsberger, Participant Media, Nala Investments and private equity fund Rizvi Traverse Management.

Lionsgate and Summit have had discussions about a union going back as far as fall 2008, just before the bow of the first “Twilight” pic. Those discussions resumed last fall in the wake of Lionsgate’s settlement with longtime adversary Carl Icahn under which the billionaire agreed to sell off this stake end his three-year quest

Lionsgate shares appreciated by 28% in 2011 and have gained another 3% this year.

Summit’s strategy has been to release and distribute 10-12 films per year, with a focus on the midrange films that the majors are less likely to greenlight. Aside from “Twilight,” Summit’s bread and butter has continues to be broad-based fare at moderate prices with recognizable stars such as “Red,” “Source Code” and a pair of thrillers now in post-production: “Man on a Ledge” with Sam Worthington and “Cold Light of Day” with Henry Cavill, Sigourney Weaver and Bruce Willis. Upcoming pics include dance pic “Step Up 4″ and vampire romancer “Warm Bodies.”

Besides the fourth “Twilight,” “Source Code” and ‘The Beaver,” Summit’s 2011 release slate included “The Darkest Hour”, “50/50″ and Chris Weitz’ drama about Mexican immigrants in Los Angeles, “A Better Life.”

A “Red” sequel has been dated for next year but Summit hasn’t locked down a director. Summit’s also been attempting to launch a “Highlander” reboot.

Summit also scored a bit of a stunner two years ago with Oscar-winner “The Hurt Locker” — the lowest grosser of any Oscar Best Picture winner.

Unlike Summit, Lionsgate also has a sizable TV production-distribution operation that is home to series including AMC’s “Mad Men,” Showtime’s “Weeds” and “Nurse Jackie,” “Boss” on Starz and the upcoming Charlie Sheen sitcom “Anger Management” on FX. Its Debmar-Mercury syndication operation includes “Tyler Perry’s House of Payne” and “The Wendy Williams Show.”

Lionsgate has grown through acquisitions during the past dozen years under Feltheimer and Burns. The duo have orchestrated the acquisitions of film and video libraries including Trimark in 2000, Artisan in 2003, Redbus in 2005, Debmar-Mercury in 2006, Mandate in 2007 and TV Guide Network in 2009, as well as a stake in distrib Roadside Attractions in 2007.

Despite the battle with Icahn, Lionsgate remained an active bidder for MGM in 2009 and 2010 before the Lion went through its pre-packaged bankruptcy in late 2010 in a deal that left Spyglass toppers Roger Birnbaum and Gary Barber in charge.

Lionsgate announced in November that it had lost $24.6 million in its second quarter ended Sept. 30 due partly to disappointing perfs from “Conan the Barbarian,” “Warrior” and “Abduction.”

Lionsgate’a balance sheet had $590 million in debt as of Sept. 30. It has about 13,000 titles in its film and TV library.

JP Morgan, Barclays Capital, and Jefferies served as joint lead arrangers and joint bookrunners on financing the acquisition for Lionsgate with JP Morgan, Barclays Capital and Jefferies also serving as financial advisors. Barclays Capital provided a fairness opinion to Lionsgate. Wachtell, Lipton, Rosen & Katz served as outside legal counsel for Lionsgate. Liner Grode Stein LLP and Skadden, Arps, Slate, Meagher & Flom LLP served as outside legal counsel for Summit.

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