Lionsgate Close to Deal to Buy Summit; Friedman and Wachsberger Likely to Remain

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Summit, Lionsgate

The long-discussed combination of two of Hollywood's top independent studios is nearly a done deal.

Two sources confirm that Lionsgate is closing in on an agreement to acquire Summit Entertainment for about $400 million in cash plus the assumption of debt. The sources say the deal also includes the services Rob Friedman and Patrick Wachsberger, the two top executives behind the studio that has ridden the Twilight movie franchise to the top ranks of Hollywood.

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All of the deal points are not final but there is a general agreement, say the sources. An official announcement will take at least another few days and a final deal could take even longer.

As a public company, Lionsgate, which makes both films (Warrior, the Tyler Perry franchise, the upcoming Hunger Games) and television (Mad Men), would be required to disclose a tentative agreement that would be material to its stock price and future – which this certainly would be. Lionsgate, traded on the New York Stock Exchange, closed Friday at $8.41 a share, not far off it’s high for the past year. 

Spokesmen for both Lionsgate and Summit, which is privately held, declined comment on Saturday.

The two companies have held merger discussions several times in recent years without ever reaching a deal. The latest talks heated up late in 2011. Also reportedly bidding for Summit was the new Miramax.

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Terms of the deal will allow the investors in Summit to cash out only about 10 months after they completed a $750 million refinancing of their original investments. That left Summit with a debt of just over $500 million, which will be wiped out by some of the cash from Lionsgate, and the assumption of as much as $300 million in debt.

It was important to Lionsgate to do the deal in a way that did not dilute its stock. However, this purchse will add to its debt, which is already close to $600 million.

The biggest investor in Summit is Peak Group Holdings, which has about 48%. The Peak Group includes investments by Suhail Rizvi's Rizvi Traverse Management (which also owns a stake in the ICM talent agency), Jeff Skoll's Participant Media, Emilio Diez Barroso's Nala Films and entities affiliated with the Omar Amanat family trust.

The second largest group of owners are Summit management, who control about 30% of equity. They include Wachsberger, Friedman, chief operating officer Bob Hayward and president of international David Garrett.

The biggest issues in the recent talks, according to sources, were over the valuation of Summit and the way the existing management would be rearranged in the merged entity.

Valuation was difficult because the modern Summit (which is an outgrowth of a longtime foreign sales company) has had a mixed track record except for the phenomenal global success of the Twilight movies, which have grossed more than $2.5 billion worldwide – with one more to come in November. Valuing the company in the wake of the most recent Twilight movie would suggest very high price, perhaps more than its ultimate worth.

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Sources also say that Lionsgate is very interested in bringing in Friedman and Wachsberger, the two leaders who helped propel Summit from an indie that was losing money to one of the most profitable studios in Hollywood. Since both companies have movie production and international sales units, it is unclear how they will be merged, but keeping key people in place does appear to be the intent.

Summit, which began making movies in 2007, does not have much of a film library, while Lionsgate has a very large one. Over the past decade Lionsgate has gobbled up the film libraries of Artisan Entertainment, Trimark Holdings and others, so it now has about 13,000 movie and TV titles. It has been adding at least another dozen pictures a year. Its biggest recent success was The Expendables, released in August 2010, which has grossed more than $100 million domestic. But the company has suffered a string of flops recently, including Warrior, Conan and its most recent release, Abduction, a Taylor Lautner action film that grossed a disappointing $28 million domestic (but $54 million overseas).

Lionsgate is currently preparing to release what it expects to be a major new franchise with Hunger Games, based on a bestselling book, which is due to hit theaters in March. An acquisition of Summit would give Lionsgate the final release in an existing teen franchise, this November's Twilight: Breaking Dawn Part 2, as well as access to Summit's experienced marketing team to help with the Hunger Games franchise.

Unlike Summit, Lionsgate is a diversified company with busy TV and TV syndication divisions. In addition to the Emmy-winning drama Mad Men, it makes Showtime's Weeds and Boss on Starz.

The TV syndication division, Debmar-Mercury, has shows including Tyler Perry's House of Payne, The Wendy Williams Show and Family Feud.

Lionsgate also operates channels (with partners) including FEARnet, TV Guide Network,  EPIX pay TV and Tiger Gate, which operates branded action and horror channels in Asia.