Lionsgate: Mediocre Box Office Take, but Still Profitable

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 |  Includes: DISK, LGF
by: Travis Johnson

It's been a strange couple of months for Lionsgate Films (NYSE:LGF), the film and TV studio/library known for slasher hits like Saw, indy film successes like Crash, and a huge library of filmed entertainment of all kinds.

Hostile takeover?
It started with the solid but unspectacular quarterly earnings announcement at the beginning of August. The quarter itself was pretty weak, with not much in the way of TV deliveries or box office hits, thanks to the weakness of Akeelah and the Bee, but they still beat the analysts' number, thanks to lower costs.

And the outlook was very good -- nine prime time series on the slate for this fall, and several solid films scheduled and on track, including Saw III for Halloween.

So that quarterly release didn't do much for the LGF ticker, though in the weeks since then it steadily moved up roughly 10% to where the shares now stand. Why?

Well, first we had an interesting leak during the conference call. LGF execs let slip that at least some of their film library would be available on iTunes, before Apple had acknowledged the open secret that iTunes would be used to sell movies (though LGF didn't end up being part of the initial Apple announced rollout, according to Frank Barnako).

And then the corporate raider actions began. When I first heard that Lionsgate was involved in an activist shareholder fight, my initial assumption was that it was one of LGF's shareholders. The name that first came to mind was Carl Icahn, who as of his last SEC filing in August still held a bit over four million shares, which is in the neighborhood of a 4% stake.

But it wasn't Icahn agitating for Lionsgate to sell its film library or put the company up for sale, which is what many folks have expected since his holdings were made public in the spring.

No, it was LGF agitating for a new board at Image Entertainment (OTC:DISK), a DVD distributor that they own part of and have tried a couple times over the past year to take over (first with stock, then with cash). Image has rebuffed LGF and has been searching recently for "strategic alternatives" (not unlike Imax's recent disastrous search), but Lionsgate has accused them of severely bungling that process. Lionsgate continues to have an offer on the table for Image shares even as Image accuses them of artificially depressing their shares and attempting a hostile takeover.

This is exhausting.

There is certainly a solid argument to be made that LGF and DISK make a good pair. DISK is a company with a huge film library, and a distributor that can get those DVDs to retailers. But I don't know that bringing the troubled Image Entertainment into their stable will help Lionsgate much in the near term, and it doesn't seem likely that this fight, though it has certainly kept LGF in the news, would bring their shares up. On the contrary, we'd generally expect a takeover fight to depress the shares of the potential acquirer.

Juicy Hollywood rumors boost shares
So what has moved the shares? Well, SG Cowen upgraded LGF last Friday, which helped a bit. The analyst said that he thought that film revenues would continue to beat expectations, but that more conservative spending by management would (for a change) allow them to beat the earnings expectations as well, on the back of a good film slate for the coming year.

He singled out Jessica Simpson's Employee of the Month as well as Saw III and some other upcoming releases as bright spots. That upgrade brought a new 52 week high, though today a downgrade from Sanders Morris took a little back.

So perhaps the fact that we're getting close to another few film releases is really what has helped LGF keep up with the ebullient market this month. After all, Jessica Simpson and Dane Cook have managed to get themselves on the cover of plenty of magazines with their on-set-romance rumors, which they recently tried to put to rest just in time for the Employee of the Month premiere. Maybe fans will flock to the flick just to see if the sparks really flew.

Either that, or investors are really excited about the hordes who are likely to flock to Saw III in a month to see if the blood really flies.

But I don't really know.

Even mediocre can be profitable
I continue to be amazed at LGF's resilience, and that's a big part of the reason that I still like the company. As I've picked up shares over the past year and a half, I've looked forward optimistically to lots of potential hit films -- Lord of War, In the Mix, and Akeelah and the Bee among them -- and most of them have flopped. LGF has had disappointment after disapointment in most of the recent films that fall outside their two biggest current franchises: Tyler Perry (Madea's Family Reunion, etc.), and horror (Hostel, Saw).

But still, they keep churning out the films and TV shows, and making money on many of them even as they lack blockbuster hits, and the library continues to grow.

So I'm giving up trying to pick which of Lionsgate's myriad offerings will find an audience ... I'll just resign myself to the knowledge that as long as the productions keep coming fast and furious, and they continue to keep costs low, it doesn't take many hits to make for a good year. Even consistently mediocre performance, by Hollywood standards (ie, no $100 million box office results), can be quite profitable.

And even a bad year could always bring a buyout. Lionsgate has itself been the subject of takeover, sale or breakup rumours for years, thanks to the value of its huge film library. Icahn certainly stoked those rumours when his funds took a stake, and every few months someone publishes a new story bringing up the value of LGF's library (in July it was CNN/Money). I've written plenty about this before, with an update on a recent library acquisition here, and more thoughts on the company's strategy here.

I sold some of my shares before this latest move up as part of a move to reduce my margin exposure, but I still like the company and continue to hold a position with the knowledge that I might need to be very patient. Whether a good season of films, some television hits, or a takeover is the final inspiration, the fuel for a rise in Lionsgate shares remains in the stock. But it has been there for years, with no guarantee that the fuse will be lit at any given time, or ever.

LGF 1-yr chart:

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