Wall Street Analysts Chime in on Possible Lionsgate-Summit Deal

42 REV Twilight Breaking Dawn Part 1 H
Andrew Cooper/SMPSP/Summit Entertainment LLC

Edward (Robert Pattinson) and Bella (Kristen Stewart) get married and pregnant in this installment.

Observers like the combination of the "Hunger Games" and "Twilight" studios, with one saying that “M&A has been an important element of value creation for Lionsgate.”

NEW YORK – With Lionsgate over the weekend inching closer to a possible $700 million acquisition of Summit Entertainment, Wall Street analysts on Monday gave the potential studio deal positive reviews.

Not knowing the valuation multiples since [privately-held] Summit’s financials are not available, I think it should be a positive for Lionsgate as Summit is proving it can do more than just Twilight,” said Miller Tabak analyst David Joyce who called 50/50 an “okay” performer at the box office. “Lionsgate shares dipped last week when it seemed like the deal was not going to happen.”?

Evercore Partners analyst Alan Gould is also optimistic on a potential deal. “M&A has been an important element of value creation for Lionsgate,” he wrote. “The company acquired Trimark for approximately $50 million in late 2000, Artisan for approximately $375 million in late 2003, which was a major driver of its stock, its U.K. subsidiary in 2005, Debmar Mercury, its TV syndication division in 2006, Mandate Pictures in 2007, and TV Guide Network in 2009. While media investors typically loathe M&A, we have found horizontal acquisitions executed at the right price can be accretive - it is expensive vertical acquisitions that have typically led to shareholder destruction.”??He also highlighted that the key asset in Summit is its ownership of the The Twilight Saga franchise, the fourth largest grossing franchise in Hollywood history behind only Harry Potter, Star Wars and James Bond.

“The companies are fairly similar so we assume that a merger also should lead to significant operating and overhead savings,” Gould added without providing a detailed estimate.

He continues to rate Lionsgate’s stock at an “equal-weight” rating, but said “we reiterate that Lionsgate management has historically shown financial discipline and either struck good deals or walked away. So our first impression of a potential Summit deal is that it would be good news or no news.”

?Meanwhile, Stifel, Nicolaus analyst Ben Mogil issued a report entitled: “Now Playing From Lionsgate: The Summit LBO, And We Give It A Nice Review.” He argued: “While we don’t see the deal as having the operational benefits of past Lionsgate purchases (i.e. Artisan), rather we see the deal as a leveraged buyout with solid cash flow visibility for the next few years, because of Twilight. With Summit largely completing the Twilight productions, their revenue strongly converts to free cash flow, which…allows the company to likely re-pay the purchase possibly inside of four years and de-risks the importance to 2012 of Hunger Games."

Collectively, the Twilight franchise should generate $1.4 billion of revenue in the 2012-2017 time frame, estimated Mogil. Deducting royalties/participation and capital to complete and market Twilight: Breaking Dawn Part II, “the net is around $1 billion in free cash flow to Lionsgate over this time frame before merger-related synergies,” he said.

To help pay for a transaction, a TV Guide Channel sale “is likely accelerated with this deal,” Mogil said. He also said that Summit’s cash balances include some $200 million for future productions, “which Lionsgate may jettison.”?

Overall, Mogil retained his “hold” rating and $9 fair value estimate on Lionsgate’s stock though.?

Email: Georg.Szalai@thr.com

Twitter: @georgszalai