Lions Gate to acquire Summit

By Ben Fritz

Jan. 14, 2012 12 AM PT

Combining Hollywood’s two biggest independent film studios and the blockbuster young adult franchises “Twilight” and “The Hunger Games” into one powerful entity, Lions Gate Entertainment has agreed to acquire Summit Entertainment for $412.5 million in cash and stock.

The two Santa Monica companies have engaged in on-and-off merger talks since late 2008 as Lions Gate sought to bolster its library of film and TV properties and Summit’s investors tried to cash in on the lightning-in-a-bottle success of the “Twilight” movie series, which has grossed $2.5 billion worldwide over four films.

The decision to finally join forces is evidence of a consolidating entertainment business and shows the power of hot young adult properties. Most of the value in Summit comes from “Twilight,” while Lions Gate has gained heat on Wall Street over the past few months in part because of expected revenue from “The Hunger Games.”

“These companies are a great fit because there is a significant amount of revenue growth, there are cost synergies and together we’ll have a commanding presence in the young adult demographic,” said Lions Gate Chief Executive Jon Feltheimer.

The two firms, located around the block from each other, collected more than $1 billion combined in domestic box-office sales in 2010. Combined revenue for 2012, with “Hunger Games” and “Twilight” coming out, could rival Hollywood studios such as Paramount Pictures and 20th Century Fox.

The merger will also put Summit together with Lions Gate’s fast-growing television operation behind “Mad Men” and “Weeds,” and could even bring the potential for a “Twilight” television series.

Although acquisition talks fell apart most recently in the summer of 2010, executives at the two companies remained in contact, including on the golf course where Feltheimer and Summit Co-Chairman Rob Friedman play together. Deal talks restarted this fall after Lions Gate’s largest shareholder, Carl Icahn, a longtime critic of Feltheimer and his vice chairman, Michael Burns, sold his stake.

Summit was also courted by other suitors, among them private equity fund Colony Capital, which wanted to merge Summit with Miramax films, and a consortium of Chinese investors.

The acquisition will provide a windfall to Summit’s investors, among them EBay co-founder Jeff Skoll’s film company Participant Media and private equity fund operator Suhail Rizvi’s Rizvi Traverse Management. Summit’s investors previously received a $200-million dividend as part of a recapitalization in early 2011. Friedman and fellow Summit Co-Chairman Patrick Wachsberger together own about 30% of the company.

With “Twilight” winding up this year, Summit’s owners felt the company was at a turning point where they needed to either cash out or decide to double down and expand the studio.

“Participant and Rizvi and other investors were prepared to inject more funds into the company to dramatically expand its operations into TV, library acquisition and other media platforms so it was not so singularly reliant on film,” said Participant Chief Executive Jim Burke. “This could have gone in a completely different direction.”

By agreeing to be acquired by Lions Gate, however, Summit’s owners were able to take a cash payout of about $350 million. About $50 million to $70 million of the acquisition will be done in stock, giving Summit investors a stake of more than 5% in the combined company.

Outside of “Twilight,” Summit has failed to find much success on the big screen, with a list of flops that include the Brendan Fraser comedy “Furry Vengeance,” Mel Gibson’s “The Beaver” and “A Better Life,” a well-reviewed drama about Mexican immigrants living in Los Angeles. The disappointments far outweighed a few modest successes such as the action movie “Red.”

While Summit will continue as a separate movie label under Lions Gate, the two companies are expected to merge their movie operations over the next few months. That will result in the elimination of an undetermined number of jobs in their production, marketing and distribution operations.

Lions Gate has about 500 employees; Summit has about 160.

“We are going to take the time to slowly but consistently meld with their team and form a bigger company when we’re done,” said Friedman.

Lions Gate has yet to close employment agreements with Friedman and Wachsberger, but the pair are expected to become heads of Lions Gate’s motion picture group, according to people familiar with the matter but not authorized to speak publicly.

Lions Gate’s current film group president, Joe Drake, who was already under pressure after a weak showing at the box office over the last year, is expected to depart, those people said. Feltheimer said Drake will continue to shepherd “The Hunger Games” through to its March 23 release.

The combination of the two studios comes as the economically challenged entertainment sector has seen the number of studios making and releasing movies shrink amid falling DVD sales and continued efforts to transition to digital distribution.

Although Lions Gate is set to release 12 movies this year and Summit eight, Friedman said that combined they would likely end up putting out between 12 and 14 pictures a year.

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Lions Gate

Highest-grossing movies (worldwide ticket sales):

1. “The Expendables,” $274. 5 million

2. “Fahrenheit 9/11,” $222.4 million

3. “Saw III,” $164.8 million

4. “Saw II,” $147.7 million

5. “Saw IV,” $139.3 million

TV shows include:

* “Mad Men”

* “Weeds”

* “Nurse Jackie”