Lionsgate Pins Growth Plans on 'Ender's Game' and 'Catching Fire' (Analysis)
Over the next three years, 62 percent of the studio's EBITA will come from just two franchises -- "Hunger Games" and "Twilight" -- as CEO Jon Feltheimer finds new ways to blast its $5 billion market cap.
This story first appeared in the Nov. 8 issue of The Hollywood Reporter magazine.
In March 2012, Lionsgate CEO Jon Feltheimer and the cast of its AMC drama Mad Men rang the opening bell at the New York Stock Exchange. "I think back to when we first rang the bell in 2004, and we didn't have Mad Men and we didn't have Hunger Games, and we didn't have Expendables," gushed Feltheimer to CNBC's Jim Cramer that day. "You know, the company is growing beautifully."
That was only the beginning. In the 19 months since Feltheimer rang that bell, Lionsgate stock is up 140 percent, five times the growth of the S&P 500. The company, which began in 1997 as a tiny Vancouver-based distributor, has become so large -- it boasts a market capitalization of around $5 billion, more than twice that of DreamWorks Animation -- that the often-used term "mini-major" no longer seems adequate.
But now Lionsgate is facing key tests of whether it can sustain that momentum. Beginning with the Nov. 1 release of the young-adult adaptation Ender's Game, followed by the sequel The Hunger Games: Catching Fire on Nov. 22 and another new YA adaptation, Divergent, in March, the studio once known for low-budget horror films and Tyler Perry comedies is poised to have three major franchises. Investors are hoping those films will work, given that its Twilight property, acquired through the 2011 merger with Summit Entertainment, is winding down after taking in $3.3 billion worldwide.
"I like the management, but they are riding high on Hunger Games and Twilight, and those are hard to replace," says Doug Creutz, a Cowen & Co. analyst who downgraded Lionsgate stock to "neutral" in September. "It's hard to see how they grow the film business from here." Lionsgate shares closed at $34.76 on Oct. 28.
Since its founding by Canadian mining magnate Frank Giustra, Lionsgate largely has grown through acquisitions, first nabbing Artisan Entertainment in 2003, then a piece of the indie distributor Roadside Attractions, a TV distribution business in Debmar-Mercury and finally the $412.5 million purchase of Summit that added Stephenie Meyer's sparkly vampires and film execs Rob Friedman and Patrick Wachsberger. "The company went through a complete and utter structural transformation, where it went from a small, independent producer to the owner of a number of blockbuster franchises with multiyear visibility and earnings," notes RBC Capital Markets analyst David Bank.
Lionsgate revenue surged 71 percent to $2.71 billion from fiscal 2012 to 2013. But Creutz estimates -- rather ominously -- that for the next three years, 62 percent of the company's earnings before interest, taxes, depreciation and amortization will come from just two properties: Twilight and Hunger Games.
To lessen its dependence on the hit-or-miss film business, Lionsgate is relying more than ever on television. It expects to produce 11 shows in the current fiscal year, including Mad Men, Orange Is the New Black for Netflix, Nurse Jackie for Showtime, Anger Management for FX and Nashville for ABC. Lionsgate also has partnered with MGM and Paramount on the cable channel Epix, and Debmar-Mercury is expanding its "10-90" approach to TV syndication, in which it sells 10 episodes for a test-run and renews for an additional 90 episodes. (Lionsgate also invests in digital businesses and music publishing. Through an arrangement with Net-a-Porter, it plans on rolling out a fashion and jewelry line from the Catching Fire costume designer.)
Not surprisingly, Feltheimer, 62, says he wants a third of Lionsgate's revenue eventually to come from its TV division, led by Kevin Beggs. However, in the most recent fiscal year, the company reported $2.2 billion in revenue from motion pictures and only $379 million from television. That means that for the foreseeable future, movies will remain Lionsgate's bread and butter.
And as the rest of Hollywood knows, the film business can be boom or bust. Eight years ago, Feltheimer boasted that Lionsgate risked no more than $8 million on any one film, citing such hits as the Saw and Hostel franchises. Those days are long gone, but investors aren't complaining that Hunger Games: Catching Fire cost $130 million as long as the pricey investment delivers on par with the $691 million global box office of the first installment. "Having 10 films that outperform and five that underperform will never have the operating leverage of one $700 million global film," says Ben Mogil of Thomas Weisel Partners.
Lionsgate has been diversifying its film efforts as well. In 2010, it launched, along with Grupo Televisa, Pantelion Films, an arm devoted to distributing films aimed at Latino audiences. Its Mexican comedy Instructions Not Included, released in September, has become the top-grossing Spanish-language film of all time with $44 million and counting.
Hunger Games, based on the Suzanne Collins trilogy about kids forced to fight to the death, has two more installments, due in 2014 and 2015. And Lionsgate actively is seeking to develop other properties and position itself as the home of YA titles turned into film franchises. "In the young-adult space, in all our intellectual property we now have over a quarter of a billion fans on Facebook alone," vice chairman Michael Burns said on CNBC.
Still, Ender's Game, about an alien race attacking Earth, is a risky proposition. Though Lionsgate's Summit label minimized exposure by releasing the $110 million-budget film only in the U.S., controversial anti-gay remarks by the novel's author, Orson Scott Card, and a sci-fi storyline revolving around young children could limit its broad appeal. Tracking indicates the movie will open in the mid-$20 millions domestically. Analysts also express concern over 2014's I, Frankenstein, a special-effects-laden movie in which Dr. Frankenstein's creation (Aaron Eckhart) gets involved in a power struggle between gargoyles and demons.
Lionsgate has higher hopes for Divergent, about a dystopian future in which people are divided into factions based on their personalities. The film, starring Shailene Woodley, already is being positioned as the next Hunger Games.
If so, then, will Hollywood soon drop the "mini" qualifier when speaking of Lionsgate? Some already have. "If you're making Hunger Games and Twilight, you're a major studio," says Creutz. "Heck, they're putting out more films than Disney and Paramount nowadays. Not as big, but more of them."
And without a physical studio lot or a bevy of rich development deals, "They are running a leaner-cost business," adds Wunderlich Securities analyst Matthew Harrigan. "I think for all practical purposes, in terms of market share, talent relationships and power to get into a release window, they are a de facto major. It's really been an amazing story."
Etan Vlessing contributed to this report.