Lionsgate's Major-League Makeover

6:00 AM PST 11/27/2012 by Kim Masters

With $1 billion in box office this year, the home of "Twilight" and "The Hunger Games" beats Fox in market share, has money to acquire another studio and the kind of frugality that makes Wall Street fawn.

Like Bella Swan in Twilight, Lionsgate is undergoing a radical, potentially life-changing transformation. As many major studios are in retreat, the publicly traded conglomerate is advancing. Breaking Dawn -- Part 2 has pushed it for the first time past the $1 billion mark at the domestic box office this year, and with the Hunger Games franchise still in its arsenal and 15 releases planned for 2013, Lionsgate is starting to look more like a major than a mini.

But the company isn't there yet. Despite a January merger with Summit Entertainment, it lacks global distribution and must sell off foreign rights to its films. And while Lionsgate library revenues are climbing (it owns such films as The Blair Witch Project and The Expendables), the company doesn't have the extensive assets that derive from decades of existence. "There's a difference between a well-financed mini-major and a major," says a top studio executive, but Lionsgate "could easily evolve to some version of a major studio."

That's why there is speculation that Lionsgate might go shopping. A studio insider says the company would look at Sony Pictures if that studio is put up for sale, as many believe will happen despite parent Sony's denials. (The struggling Japanese company took another hit Nov. 22 when a ratings agency downgraded its stock to "junk" status.) Sony Pictures would bring a big library as well as overseas distribution. Another high-level industry source says a flirtation may have begun with DreamWorks Animation, though insiders at both companies deny it. DWA has long sought a buyer, and though the company just closed a five-year distribution deal with Fox, that presumably would be no obstacle. What might be a problem is DWA's insistence on a significant premium over its market valuation of $1.5 billion, especially in the wake of the disappointing opening of Rise of the Guardians, which bowed to just $32.3 million.

After a bruising battle to fend off investor Carl Icahn in October 2011, Lionsgate stock has risen more than 75 percent in the past year, and the market values the company at $2.2 billion. Lionsgate just reported strong second-quarter results, with revenue of almost $707 million. Only television production, at $99 million, was down from last year by 29 percent (which included the sale of the first four seasons of Mad Men to Netflix). But Lionsgate has a 100-episode order for Charlie Sheen's Anger Management from FX, and while Nashville hasn't been the breakout hit that critics expected, ABC is sticking with it for now. CEO Jon Feltheimer told analysts Nov. 8 that the company is "clearly on track to meet or exceed our expectations" for the year.

After swallowing Summit, which gave it control of the Twilight franchise, Lionsgate paid off a $500 million loan in 10 months, well ahead of the projected three years. The company is likely to pay off $436 million in notes next year to further cut interest expenses. After that, will it open its pocketbook?

Analysts are bullish. Matthew Harrigan of Wunderlich Securities estimates that the latest Twilight film, which has grossed $578 million worldwide so far, will kick in about 35 percent to 40 percent of the company's anticipated EBITA for fiscal 2013. And while that franchise is on its last installment, James C. Goss of Barrington Research, wrote Nov. 16 that Hunger Games' $686.5 million worldwide gross this spring suggests "a potential that significantly exceeds that provided by this one highly successful film." Harrigan estimates that the four Hunger Games films in that series could generate as much as $1.8 billion in profit. And he notes that Lionsgate has acquired other young-adult titles such as Ender's Game and Divergent in hopes of extending its streak.

What's really telling, he says, is that "when you look at the market share of Lionsgate plus Summit Entertainment, they're well ahead of Paramount and Fox this year." While market share is not necessarily related to profitability, Harrigan says Lionsgate's slice of the pie is meaningful because "they've been very cost-disciplined." He adds, "If they continue to create new franchises, particularly on the film side, the stock remains significantly undervalued."

That discipline is likely to inform Lionsgate's thinking about a major acquisition -- though no doubt the company doesn't mind being seen as player in the big game. But one source with close ties to the studio believes the company, considerably leaner than its big competitors, wants to stay "scrappy." Even if Lionsgate looks to make deals, this person says, "I don't think they'll ever overpay for anything. That is not their nature."

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TWO STUDIOS, ONE CROWDED FILM CALENDAR

When Lionsgate bought Summit, it faced the daunting task of merging their film slates. Now, after releasing 21 movies in 2012 -- more than any studio save for Sony and Warner Bros. -- the company has 15 titles scheduled for 2013, including a few that could compete against each other for audiences. Summit's zombie pic Warm Bodies and Lionsgate's buddy comedy Stand Up Guys, starring Al Pacino, Christopher Walken and Alan Arkin, both open Feb. 1 but are targeting different demos. Two weeks separate the Aaron Eckhart horror thriller I, Frankenstein (Sept. 13) and the Arnold Schwarzenegger action pic The Tomb (Sept. 27). And in November, there's just a three-week buffer between Summit's franchise-hopeful Ender's Game (Nov. 1) and Lionsgate's The Hunger Games: Catching Fire (Nov. 22). After that, Lionsgate/Summit intends to trim its annual output to 12 or 14 films. -- Pamela McClintock

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