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Lionsgate Courts Buyers as It Struggles to Compete With Industry Heavyweights

Lionsgate won’t win an Oscar for subtlety.

In earnings calls, investor conferences and television interviews, CEO Jon Feltheimer and Vice Chairman Michael Burns have made it clear that the studio behind “Mad Men” and “The Hunger Games” is willing — even eager — to sell its film and television studio.

Burns told CNBC in January that Lionsgate was a “pint-sized bite for some of these giant market cap companies” and therefore would “talk to anybody at any time” about a merger, while Feltheimer mused to Wall Street analysts in February that the media company could be “prey or predator” when it came to playing Let’s Make a Deal. Those may sound like sedate comments, but in corporate speak, the two executives seem to be chumming the waters.

“Now more than ever Lionsgate will be willing to entertain any kind of serious bid for the company, as opposed to maybe in the past when it would have dismissed such a scenario,” said Tuna Amobi, director and senior equity analyst at CFRA Research. “To be a more formidable player in this media and entertainment landscape, you need to have the scale to do so.”

Hardly a month goes by without rumors of some megadeal involving Lionsgate trickling out into the press. It’s not all idle chatter. Last year, Lionsgate came close to being acquired by Hasbro before talks broke down over pricing. The toymaker wanted to offer the company more than $40 a share, but board chairman and lead shareholder Mark Rachesky thought Lionsgate was worth more and killed the pact, insiders say.

Now, months later, shares of Lionsgate are trading at just over $28. Although the company hasn’t hired a bank to explore a sale, top executives have had conversations with potential buyers, and there’s a growing sense internally that it’s only a matter of time before they’re on the receiving end of another offer. It remains possible that the company could also acquire something as it looks to bulk up. It had, for instance, considered making a play for parts of The Weinstein Co., which is considering filing for bankruptcy.

But being the target of sales talks is a new position for Lionsgate, which over the course of its 21-year history has often been the one kicking the tires on cable networks, film libraries or movie studios, breaking out the checkbook to purchase the likes of Summit and Starz. But times are changing.

“The strategy has always been to sweep up, vacuum up whatever smaller companies they can find,” said media analyst Hal Vogel. “They have reached that point where there’s not much left to vacuum up and now they can sell themselves.” Over the years, Lionsgate has invested hundreds of millions of dollars buying up the assets of companies such as Artisan, Debmar-Mercury and Trimark and taking a stake in Roadside Attractions.

A sale makes sense in many respects. The media business is undergoing industry-wide consolidation: Telecoms are siphoning up studios, Disney has become a globe-spanning colossus and Silicon Valley is getting into the content game. Even the Murdoch clan, warily eyeing a landscape in which the once lordly 21st Century Fox was looking increasingly runty, decided to cash in. The family is in the process of selling the bulk of its television and film assets to Disney, for $52.4 billion.

And that’s not even the megadeal shaking up Hollywood. AT&T is scrambling to win approval for its $85 billion purchase of Time Warner, and CBS and Viacom are considering a merger. Two years ago, Lionsgate made its own attempt to achieve scale, shelling out $4.4 billion for Starz. But even with the cable assets that Starz offers, Lionsgate will be dwarfed by these 21st-century media and technology titans.

Barton Crockett, managing director at B. Riley FBR, said the wave of consolidation sweeping the entertainment industry means that Lionsgate is “dancing in between elephants.”

That puts it at a competitive disadvantage. In the era of big media consolidation and tech companies like Apple and Netflix pumping billions into creating original in-house movies and shows, a studio the size of Lionsgate has more to lose when a film or television program under-performs. “The game is getting tougher because of a whole bunch of new players with multiples of capital available,” Vogel said. “There’s no way that you can outdo these companies, because they have capital resources that you don’t have — and you won’t have unless you bulk up.”

Lionsgate is also feeling a time crunch to find a buyer because of increasing interest rates, Vogel said. “If you have a projection that rates are going to rise some more, you’re thinking, ‘I’d better get my deal done now while the financing is less expensive.’”

Lionsgate may find itself looking up at these new media goliaths fearfully, but its library of 16,000 film and television titles, and history of making hit movies and shows, also explain why it would be an attractive target for a company looking to join forces or to bolster its own content offerings. One scenario that intrigues Lionsgate is a union with Sony’s entertainment operations. The technology maker has long struggled to balance its device-manufacturing with its moviemaking businesses. Spinning off its Hollywood arm and combining it with Lionsgate’s assets could help the studio compete with the likes of Warner Bros. and Disney.

A Sony pact may face too many logistical hurdles, however. That would likely leave a new media company like Facebook, Apple, Amazon or Netflix as a potential landing spot. All of those firms have cash on their balance sheets and size and scale that far exceed Lionsgate’s market cap of roughly $6 billion. It’s not just that the studio is easily digestible. Making movies and television shows is a hard business, and buying Lionsgate would give these companies access to creative talent and a global distribution network. There’s also the possibility of a tie-up with a telco: A Verizon or a T-Mobile might want to counter AT&T’s purchase of Time Warner by snapping up a studio of its own and funneling self-owned shows to its millions of subscribers.

Politics may be the deciding factor.

The financial windfall companies are enjoying from the recently passed tax cuts means that capital that was being stored offshore is being repatriated. It also leaves these businesses with money to burn, a position that could heighten merger-and-acquisition activity.

Cash won’t be an issue, but fears of a government crackdown on corporate marriages could stall plans. Companies will be looking at the resolution of the antitrust lawsuit filed by the Department of Justice to block the AT&T merger with Time Warner, Crockett said. “If AT&T wins and DOJ loses, I think we’re going to see a huge scramble for consolidation,” he noted. “That’ll take away a huge cloud of concern.”

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