Why the Imminent Lionsgate-Summit Merger Makes Sense

Why the Imminent Lionsgate-Summit Merger Makes Sense

Analysis: For $400 million, the Vancouver-based studio gets the last “Twilight” film and international distribution expertise

ANALYSIS

A merger between Lionsgate and the smaller indie studio Summit, which is expected to be finalized this week, will give the combined entity more heft in the marketplace and protect each of them from market forces and unwelcome predators.

Also read: Lionsgate Close to $700M Deal to Buy Summit

It's a union that makes a great deal of sense.

“It looks very smart to put these two small studios together,” Marla Backer, an analyst at Hudson Square Research, told TheWrap. “Combined, they’re going to have a lot more leverage than either would independently. It’s really difficult for smaller studios to compete today.”

While the details are still being hammered out, the price will likely take the form of $350 million in cash, $50 million in stock and the assumption of Summit’s debt, according to individuals with knowledge of the deal.

A marriage with the "Twilight" kids won't catapult budget-conscious Lionsgate into the same league as Disney or Paramount, but it will help the studio negotiate with exhibitors and scare off rivals from desirable release dates, analysts tell TheWrap.

The merger — essentially a leveraged buyout — comes just as Lionsgate is poised to launch its own tween franchise, "The Hunger Games."

Should it go through, the merger surely will mean layoffs, and places a question mark over the future of production chief Joe Drake. It also means one less buyer in an already reduced indie landscape.

Also read: Why Haven't Lionsgate and Summit Merged Yet?

The two sides are still in exclusive talks, and there’s a chance that another suitor such as Colony Capital could swoop in with a sweeter offer, but it does seem increasingly likely that an oft-discussed merger between Summit and Lionsgate will finally happen.

The stock would amount to roughly five percent of the independent studio, allowing CEO Jon Feltheimer and Co-Chairman Mark Rachesky to retain control of the company. That is critically important given the bruising that Carl Icahn and his constant takeover attempts administered to the studio’s share price over the past few years.

Much of Summit's roughly $300 million in debt will be paid off with profits from the final two “Twilight” movies, allowing Lionsgate to keep that sum off its own books.

Also read: Lionsgate Reports $24.6M in Losses Due to Weak Film Slate

In return, Lionsgate will get  a modest library of titles that also includes “The Hurt Locker” and “R.E.D.,” which it can add to its paid TV network Epix. Perhaps more important, Lionsgate will gain Summit’s expertise in international distribution — an area where it is lacking.

However, insiders at both studios feel that Summit’s experience in transforming the vampire "Twilight" series into a global box office phenomenon can help Lionsgate pull off a similar feat with "The Hunger Games." This could help turn the studio, a launching pad for mid-budget genre films, into a young adult powerhouse.

Lionsgate could use a hit. The company reported a $26.4 million loss in its last fiscal quarter on the disappointing box office performance of movies including "Warrior" and the "Conan the Barbarian" remake. The latest "Twilight" installment, by contrast, has grossed $660 million worldwide.

“Summit has been through this before,” Backer told TheWrap. “They’ve launched a major franchise before, and although Lionsgate has had some B minus or C plus franchises in the past, it’s never done something on this scale. There’s the potential for Summit to push Lionsgate up the learning curve.”

The two studios can also eliminate redundant positions in their film and home entertainment divisions, potentially adding to increased savings down the stretch.

For Summit, the deal answers the nagging question of how to capitalize on the mega-grossing “Twilight” franchise. Beyond the vampire romance, the studio’s track record has been mixed, making its future as a standalone company after “Breaking Dawn — Part 2” a risky bet.

By selling on a high note, Summit’s backers, a group that includes Rizvi Traverse Management and Participant Media, receive a substantial payback for their initial investment to go with the dividend they received in last year’s $750 million refinancing. Likewise, Summit co-chairs Rob Friedman and Patrick Wachsberger get cushy new posts overseeing Lionsgate’s film division.

Joe Drake, the president of Lionsgate’s motion picture group, will likely be odd man out when Friedman and Wachsberger take the reins.

Independent filmmakers will find one less active buyer for their offerings at film markets at a time when many major studios are dialing down their production slates.

If an agreement is reached, Lionsgate plans to keep the Summit brand, much as it has with other acquisitions such as Mandate Pictures. What that brand is beyond “Twilight” is a bit unclear. The action comedy “R.E.D.” was a $200 million worldwide hit and should spawn a sequel and some industry observers are bullish about the upcoming science fiction film “Ender’s Game,” but there’s nothing in the pipeline that seems destined to replace Bella and Edward.

That said, there’s always the potential that Lionsgate could find new unexplored areas of the “Twilight” universe — from a television show to a sequel.

Plus, with “Breaking Dawn — Part 2” due out in theaters in November, and video-on-demand and home entertainment revenues from “Part 1” set to start rolling in this spring, the tween phenomenon will keep racking up profits for another few years, by which point “The Hunger Games” may have replaced it in the hearts of preadolescents the world over.

Not bad for $400 million and debt.