Stock up on prospective acquisition of Summit

Wall Street’s initial reaction to a possible Lionsgate acquisition of Summit Entertainment was positive Monday, with shares rising 3% Monday.

Though the mini-majors have not confirmed that merger talks have progressed, Lionsgate emerged over the weekend as the more likely buyer in a deal for about $400 million in cash and stock along with assumption of a significant part of Summit’s debt. Miramax owner Colony Capital also has a bid in for Summit.

Lionsgate shares gained 26ยข to close at $8.67 in trading on the New York Stock Exchange, with several analysts offering upbeat responses to a merged Summit-Lionsgate. Shares have traded in a 52-week range of $5.69 to $8.87.

Evercore Partners analyst Alan Gould issued a comment Monday noting that mergers and acquisitions have been an important element of value creation for Lionsgate, including Trimark for some $50 million in late 2000, Artisan for some $375 million in late 2003, Debmar Mercury in 2006, Mandate Pictures in 2007 and TV Guide Network in 2009.

“While media investors typically loathe M&A, we have found horizontal acquisitions executed at the right price can be accretive — it is expensive vertical acquisitions that have typically led to shareholder destruction,” Gould added.

Stifel Nicolaus analyst Ben Mogil retained his hold rating at $9 a share. Citing the power of Summit’s “Twilight” franchise, he issued a report Monday entitled “Now Playing From Lionsgate: The Summit LBO, And We Give It a Nice Review.”

“While we do not see the deal as having the operational benefits of past Lionsgate purchases (i.e., Artisan), we see the deal as an LBO with solid cash flow visibility for the next few years, because of ‘Twilight,’” he said, adding that the supplemental revenues will likely repay the purchase possibly inside of four years and lessen the importance of “Hunger Games.”

“We await financing details before adjusting our estimates/rating but do see the deal as outlined in press reports as being positive for Lionsgate,” Mogil said.

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