The recent announcement of the acquisition of Summit Entertainment by Lions Gate Entertainment (LGF) has been rumored since 2008. Lions Gate Entertainment, the leading independent movie distributor, made the deal final with its $712.5 million buyout. The deal includes $412.5 million in equity and Lions Gate Entertainment taking on $300 million of Summit’s debt. A large portion of the debt was paid off with cash positions from both companies.
The deal between the two brings the Twilight series, which has already generated $2.5 billion in worldwide box office, together with the highly anticipated Hunger Games movies series. The Hunger Games series will be released as four movies, similar to Twilight ---as the last book will be split into two movies due to the amount of content in the book, but also to maximize revenue from the movie franchise.
An article I wrote about Lions Gate Entertainment recently highlighted the potential of the Hunger Game franchises. In that article for some reason I had three movies listed rather than the anticipated four, due to the two part finale. Below is my box office predictions with the fourth movie added into the equation. All dollar figures are in millions.
|Movie||Opening Weekend (US)||Total (US)||International||Total Box Office|
|The Hunger Games||$75||$210||$200||$410|
|Mockingjay Part I||$90||$290||$375||$655|
|Mockingjay Part II||$100||$300||$400||$700|
The first movie, The Hunger Games, was shot with a production budget of $75 million. The movie is scheduled to be released March 23rd of this year. The book series is put out by Scholastic (SCHL), who also released the Harry Potter books. A look at the Bestsellers list on Amazon (AMZN) today also shows the following:
1. The Hunger Games
2. Catching Fire
7. The Hunger Games Trilogy Box Set
1. The Hunger Games
2. Catching Fire
7. The Hunger Games Trilogy Box Set
Along with its valuable movie distribution library, Lions Gate Entertainment has a television segment that has had hit franchises for several years including:
- Mad Men
- Nurse Jackie
- House of Payne
- Are We There Yet?
Summit Entertainment was best known for the Twilight series, and it came at the perfect time as the company was borrowing money to finance pictures after a recent string of flops. Along with Twilight, the company performed well with The Hurt Locker, which won an Oscar for Best Picture, RED, Letters to Juliet, Warrior, and Abduction.
The combined companies are now scheduled to release 22 to 27 movies a year. Lions Gate Entertainment will scale back that number to make it more comparable to Time Warner (TWX), who aims to release 18 to 22 a year. Before any changes in release dates, the current lineup looks like this for the new company:
January 27 - One for the Money (Lions Gate)
January 27 – Man on a Ledge (Summit)
February 24 – Gone (Summit)
February 24 - Good Deeds (Lions Gate)
March 23 – The Hunger Games (Lions Gate)
April 13 – Cabin in the Woods (Lions Gate)
April 27 – Safe (Lions Gate)
May 11 – What to Expect When You’re Expecting (Lions Gate)
July 27 – Step Up 4 (Summit)
July 27 – The Marriage Counselor (Lions Gate)
August 17 – The Expendables 2 (Lions Gate)
August 24 – Sinister (Summit)
September 21 – Dredd (Lions Gate)
October 5 – The Texas Chainsaw Massacre 3D (Lions Gate)
October 19 – The Big Wedding (Lions Gate)
November 16 – The Twilight Saga: Breaking Dawn Part 2 (Summit)
January 18 – The Last Stand (Lions Gate)
January 18 – Now You See Me (Summit)
February 22 – I, Frankenstein (Lions Gate)
March 15 – Endgers Game (Summit)
March 29 – We the Peeples (Lions Gate)
July 26 – Dirty Dancing (Lions Gate)
August 13 RED 2 (Summit)
November 22 – Catching Fire (Lions Gate)
It was, of course, the right time for shareholders of Summit Entertainment to cash out as their leading franchise is coming to a close. The loss of the Twilight series has the potential to hurt Summit going forward if it can not produce any more box office successes. Given its management team and its integration with Lions Gate, a leader in independent movies, I think Lions Gate benefits as well.
Lions Gate is buying at a high price, but still has one more Twilight movie to release, which could turn its purchase profitable by 2013. In my most recent article about Lions Gate Entertainment, I called shares under $8 a gift and recommended purchasing them. I am once again recommending shares and placing a target price of $12 on the shares. The analysts' estimates for fiscal 2013 are $0.47 a share, which would signify a price to earnings ratio of 18. During the acquisition press release it was stated that the deal would “significantly boost earnings beginning in April”. Significantly boost earnings is not a dollar amount and varies from one person to the next.
I think the following events make the shares a strong buy in the short term:
1. Analyst’s Upgrades – Since the news of the deal happened close to the weekend, no analysts released any upgrades or downgrades on the new company. I think the long weekend has given time for people to digest the move, and I expect some to update the shares on Tuesday or Wednesday.
2. Earnings Beat – Over the last three quarters Lions Gate Entertainment has beat analysts’ predicted earnings by an average of 126%. The predictions for the current quarter (ending December 2011) are all over the place, with nine analysts predicting $-0.18 to $0.24. The average consensus is $0.09 and I will be watching on February 6th to see if the company passes that number.
3. Raised Guidance – During the February 6th earnings release, I am expecting raised guidance from the company, which could shoot shares higher on Tuesday, February 7th.
4. Release of Breaking Dawn Part 1 on DVD – The movie, which is still in select theaters earnings money for Summit, will be released on DVD February 11th. Since Summit does not have a deal with Netflix (NFLX) to delay renting movies out for 28 days, the movie will also be available in the red envelopes the same day. The previous movies have all sold well on dvd as fans look to build their collections and watch the movies over and over again.
5. Double Weekends – Since the deal just happened, Lions Gate does not have time to change two upcoming release weekends in January and February. The weekend of January 27th will see Man on a Ledge and One for the Money, both now owned by Lions Gate, competing against each other and The Grey . According to the Hollywood Stock Exchange, where users predict box office, the movies are predicted to make the following over four weeks:
- Man on a Ledge $28.8 million
- One for the Money $27.7 million
- The Grey $34.3 million
Several weekends later the company will pit two movies against each other once again on February 24th. Tyler Perry’s Good Deeds and Gone will compete with Universal’s (CMCSA) Wanderlust. The predicted box office for those movies over four weeks is:
- Good Deeds $35.4 million
- Gone $18.3 million
- Wanderlust $35.8 million
Look for the company to receive plenty of press and buzz since movie companies do not usually place movies in competition against each other, but will dominate the box office both weekends with two releases.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.