Lionsgate defies expectations

Diverse indie studio expands, bulks up releases

At first glance, the Aug. 21 premiere of Lionsgate’s Russell Crowe-Christian Bale Western “3:10 to Yuma” at the National Theater in Westwood seemed like a typical Hollywood debut.

But a few twists were, well, unique. For example, there was the traditional after-premiere party — but it was hosted by the movie’s financier, not the studio. And the film’s writers headed off to their own soiree.

It was another reminder to Hollywood that Lionsgate does everything a little differently.

Despite a series of box office disappointments, the company is not scaling back — in fact, it’s expanding. It has bulked up to 20 annual releases (15 of them wide) and is projecting north of $1 billion in annual revenue.

Its network of investments in syndicated TV, distribution and $15 million in New Mexico land (seeds that could sprout into a profitable studio lot leveraging the state’s rich tax incentives) have helped fortify the film division.

In so doing, Lionsgate is trying to buck Hollywood’s long history of indies that have either disappeared (New World, Atlantic Releasing) or were consumed by larger congloms (October-USA, IFC and, on a much larger scale, DreamWorks).

Lionsgate remains arguably the most enigmatic company in the business. The entertainment community wants to know: What exactly is Lionsgate these days, and where is it headed?

The short answer: It plans to maintain its own unusual DNA.

Rivals carp about the company’s slate, while Wall Streeters clamor for more stock buybacks to boost the share price. The subject of endless guessing and speculation, the mega-indie has long been rumored as a takeover target.

After the resourceful company won the picture Oscar for the 2005 film “Crash,” many assumed it would aim at bigger-scale prestige fare, going the route of “Cold Mountain,” the pricey Oscar hopeful that proved a Miramax disappointment. Instead, Lionsgate’s fare has remained modest and eclectic, ranging from the lofty (“Away From Her,” “Monster’s Ball”) to exploitive (“Saw,” “Hostel”) to hard-to-define (Tyler Perry films).

While it’s artistically diverse, the toppers are determined to maintain ruthless financial discipline and find ways to reduce risk to the point of elimination.

Free from debt and sporting $200 million in cash on the balance sheet, Lionsgate wields increasing genre clout (owning, for example, more than 30% of the horror DVD market) and is starting to see more traction in TV and homevid.

CEO Jon Feltheimer and vice chairman Michael Burns are a study in contradictions.

Feltheimer, a Brooklyn native raised on Long Island, is described by those he deals with as “pragmatic” and “scrappy.” After moving to Los Angeles to become a musician (singing and playing guitar for his rock band, Lightheart), he morphed into an exec role at New World in the 1980s, then spent much of the ’90s running Sony Television. (The TV part of Lionsgate has grown from $8 million to $119 million in revenue over the past seven years.)

Burns still looks like his former incarnation as a button-down investment banker, but he’s got a subversive wit and out-of-the-box creativity. Colleagues describe him as a “financial gymnast.”

Even as their lack of conventional film bona fides gave skeptics ammunition, both cut notable profiles in Hollywood, where the company’s base has shifted over the decade since its founding in Vancouver.

Chagrined by a subpar first half of 2007, the top duo and their lieutenants are salivating at the prospects for “3:10 to Yuma,” which joins the Julie Christie vehicle “Away From Her” as the company’s main kudos hopefuls. “Yuma,” which bows Sept. 7, could have a measure of commercial clout.

On Aug. 24, Lionsgate opened the Jet Li-Jason Statham “War.” Company execs are also bullish on “Good Luck Chuck,” a Dane Cook-Jessica Alba comedy touted internally as “There’s Something About Jessica,” and “Saw IV” in October, the renewal of the top-grossing horror franchise.

“We are loaded for bear,” prexy Tom Ortenberg says.

Behind the scenes, however, there is a sense that this crop of pics has to click — for image reasons as well as financial ones.

Fiscally, the major buffer for the company is its 9,000-title film library, which throws off $200 million in annual revenue. Piecing together the library, via takeovers of Trimark and Artisan, allowed Lionsgate to boost its annual film output. Few of those are acquisitions or wholly owned original productions. Most are hybrids. Take “Bratz,” a recent theatrical miss, which was mostly paid for by production/finance shingle Crystal Sky and doll maker MGA.

Seven of the last eight Lionsgate wide releases have underperformed. (The lone exception was “Sicko,” the Weinstein Co. doc for which Lionsgate got only a fee to distribute in the U.S., owing largely to Lionsgate’s attractive output deal with Showtime.)

Yet, the six misfires in the first quarter of fiscal 2008, including “The Condemned,” “Hostel: Part II” and “Delta Farce,” resulted in net losses totaling just $15 million, execs insist, because on each title, the company shared costs, presold territories or acted mainly as distributor.

Their message: As much as they aim for kudos fare, they are careful to minimize risk. Even “Yuma,” a prestige-crafted film, was mostly financed by Ryan Kavanaugh and his Relativity Media, with Lionsgate acting as a minority investor and distributor on the $60 million-plus project. On top of putting what some sources have estimated at $15 million into the production, Lionsgate says it is spending $27.5 million on P&A.

Notable moves lately have included large minority stakes in arthouse distrib Roadside Attractions and male-oriented Web destination Break.com, as well as a takeover of Mandate Pictures that has entered final talks. Two separate deals announced over the past few months, with a Goldman Sachs-led consortium and with the government of Quebec, have given Lionsgate a collective $800 million in new financing capability.

“We are always looking for ways to make things make sense,” affirms Burns, who has guided the company along with Feltheimer since 2000. “We can make a lot of money without upping the risk.”

In a way, Feltheimer and Burns’ lack of film baggage helped them see the business more clearly than execs who came of age in a screening room. They agreed to cap investments in production at $35 million — except for rare cases such as “War,” whose stars enabled significant foreign presales. They focus zealously on profit metrics like the DVD “conversion rate,” meaning how much of B.O. translates to DVD sales. Since the top duo’s arrival, the company’s financial footing has vastly improved and its market cap increased tenfold.

“They’re evolving in a way that’s similar to New Line,” says one rival company boss. “They are building on a foundation of horror and genre stuff; they have a strong library; they’re publicly traded. The trick will be to see if they really pull it off, but the way they’ve grown is really impressive.”

One glitch is Lionsgate shares, which have languished between $9 and $11 for most of the past three years, a span that included a big run-up in media stocks. But the price-to-cash-flow ratio — a good measure of near-term value — has lately been an attractively modest 12. Results in the fiscal first quarter were soft, but consistent with prior years’ first quarters, and the company reiterated its full-year guidance.

The film division cites its own number: $300 million.

The slate has cleared that bar in each of the past three years, a first for any indie. Execs also like to point to the fact that fiscal 2007, the year after “Crash” pulled off its Oscar stunner, was the company’s high-water mark in terms of revenue, at $977 million.

Beyond the fall, which also includes “Thomas Kinkade’s The Christmas Cottage,” a homespun holiday pic aimed at the vast audience for the Norman Rockwell of his generation, Lionsgate has hopes for 2008. The most promising titles include “Forbidden Kingdom,” which pairs Jet Li and Jackie Chan for the first time onscreen, and Jessica Alba horror pic “The Eye,” a remake of a Hong Kong hit in the mode of “The Ring.”

Television has also been on the upswing — not a surprise given Feltheimer’s background. The company is a producer on series such as “Weeds,” “Mad Men” and “Dead Zone,” and anticipates growing further, especially given the Quebec financing deal and the New Mexico studio plan. In a characteristic twist, the film side also benefits from the TV push. Documentaries, not always a glamorous business, become appealing theatrical prospects because Lionsgate’s TV division can produce them for a reasonable price and then partner with a TV net. Thus, Werner Herzog’s “Grizzly Man” was co-branded with Discovery; ditto “The U.S. vs. John Lennon” with VH1.

Things have certainly come a long way since 1997, when Canadian investment banker Frank Giustra founded the company with assets from an entity known as Cinepix Film Properties. Ortenberg worked for CFP and was Lionsgate’s first L.A. staffer; the company’s headquarters in Santa Monica now houses some 350 employees.

“Even though we’ve expanded a lot in size and scope, a lot has remained consistent,” Ortenberg says.

There are some significant questions looming beyond the performance of the slate. There’s been some softening in the horror pic market, and some wonder if Mandate topper Joe Drake, a onetime Lionsgate exec who will rejoin the company once the Mandate deal closes, will be able to diversify the menu. And the number of execs with large purviews reporting to Burns and Feltheimer isn’t exactly shrinking, so anyone coming into a senior film job would represent a managerial challenge.

Plus, given the appetite for film libraries shown by the MGM and DreamWorks deals, there’s still the lingering speculation that the entire company could be swallowed up by private equity or even a major conglom angling for more market share and a bulked-up library.

“You hear so many rumors about (Lionsgate) that it makes it hard to figure them out,” offers the prexy of a competing indie distrib.

Viacom’s Leslie Moonves — a media mogul often compared with Feltheimer — reportedly kicked the tires but balked at the price.

Lionsgate execs don’t want to be taken over by a conglom, but are more open to expanding by merging with a like-sized company. This being Lionsgate, the options of course would be unconventional, such as a vidgame or music company.

But all of that is speculation, and execs wave away such ideas, preferring to keep the focus on simple execution. “We feel that we have the pieces in place to continue to be successful on our own,” Burns says.

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