COMPANY TOWN

'Hunger Games' studio Lionsgate faces a challenge as its young-adult films lose their appeal

Lionsgate was propelled into the ranks of the major Hollywood studios by young-adult franchises such as "The Hunger Games" and "The Twilight Saga." But the waning appeal of futuristic stories featuring young, attractive rebels has diminished the Santa Monica entertainment company's fortunes.

The Jennifer Lawrence-fronted "Hunger Games," central to the mini-major's rise, ended on a down note last November with "Mockingjay — Part 2," which fell short of expectations. And in the latest sign of trouble, its so-far reliable "Divergent" series appears to be faltering.

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The third installment, "Allegiant," starring Shailene Woodley as a young woman in a post-apocalyptic Chicago, opened with $29 million in ticket sales from the U.S. and Canada last weekend, down 44% from the debut of last year's "Insurgent." Lionsgate still has another movie planned from the "Divergent" series, set for release next year.

"It's disappointing," said Matthew Harrigan, a media analyst at Wunderlich Securities. "It shows the young-adult audience is fickle for everyone, including Lionsgate. They do a very good job with marketing and controlling costs, but at the same time the product has to be there."

Investors have been unimpressed. Lionsgate's stock has declined 3% to $21.89 in the two trading days since the release of "Allegiant." The shares have tumbled 47% since their 52-week high of $41.41 in November amid a box-office slump.

It's not just the young-adult adaptations that have stumbled. The $140-million special effects epic "Gods of Egypt" flopped with $29 million in domestic ticket sales so far. The studio has released a series of recent lower-profile misses such as "Norm of the North" and "The Choice."

Analysts expect "Allegiant" to eventually reach about $70 million in U.S.-Canada ticket sales, much lower than the $130-million domestic total for "Insurgent" and the $151 million peak for 2014's "Divergent." Although the studio may still break even on the new movie, industry experts agreed that Lionsgate was hoping for higher profit in line with its predecessors.

"It's got to be very stressful over there, because it will clearly not reach the potential they have been projecting," said Jason E. Squire, a film business professor at USC.

Lionsgate, known for its savvy choices and thrifty ways, hasn't always relied on teenagers fighting authoritarianism to drive its revenue. The company, founded in Vancouver, Canada, caught Hollywood's attention with successes such as 2004's highly profitable low-budget horror film "Saw" — and the multiple sequels in its wake.

But it found a box-office boon with 2012's "The Hunger Games," which took in nearly $700 million worldwide. That year, Lionsgate bought rival production company Summit Entertainment, best known for the "Twilight" movies, for $412.5 million. Lionsgate finished 2012 in fifth place at the domestic box office, ahead of 20th Century Fox and Paramount Pictures.

For the fiscal third quarter that ended Dec. 31, Lionsgate's profit fell to $40.7 million, down 59% from the same period a year earlier. Lower revenue from the motion picture segment was a drag on earnings.

Investors and executives hope the slate of upcoming films will improve results. The company expects to benefit from the kind of wide-ranging film lineup — including potential franchises, ambitious tent pole projects, and awards-friendly fare — that drove profitability prior to the studio's young-adult boom.

Lionsgate did not make executives available for comment. However, Chief Executive Jon Feltheimer touted the studio's planned releases in a recent conference call with analysts, citing "a diverse portfolio of franchise properties, branded event films and importantly, movies that return to the core strengths on which our company was built." The studio will have 17 wide releases this fiscal year, compared with 13 last year, he said.

Analysts anticipate solid performances from movies such as "Now You See Me 2" and a sequel to the 2014 Keanu Reeves action thriller "John Wick." There are also high hopes for "Deepwater Horizon," about the BP oil spill disaster of 2010, and "Patriots Day," Mark Wahlberg's drama about the 2013 Boston Marathon bombing. The company also hopes to generate new hits from properties including "Power Rangers," "The Odyssey" and "Monopoly."

Lionsgate's TV operations, behind hits such as "Orange Is the New Black" on Netflix, "Casual" on Hulu and "Nashville" on ABC, have proved a robust growth area. Last year, Lionsgate acquired a majority stake in Pilgrim Studios, the production company behind reality shows including "Ghost Hunters."

In another bright spot, the studio's film library continues to provide reliable revenue by licensing to television and online streaming video outlets.

Still, some observers remain concerned about the uneven box-office performance. Stifel media analyst Benjamin Mogil lowered his rating of Lionsgate's stock to "hold" this week, writing in a research report that the lackluster opening for "Allegiant" portends lower earnings.

"While the company's television and library businesses continue to be strong, there is no offsetting a weak new release slate," he said. "With 'Allegiant' now faltering, the impact going forward is material and more importantly brings into question how deep the young adult market is."

Lionsgate remains one of the only big studios not owned by a major media conglomerate, making it more vulnerable to the unpredictable whims of the moviegoing public. That could change if the company combined with another firm.

In February, Lionsgate said it would explore a merger with premium cable channel Starz, a move foreshadowed last year when billionaire media mogul John Malone bought a stake in the studio.

A Lionsgate-Starz merger would mark a major step in Malone's ambition to create the next big media company, but no such deal has materialized. Lionsgate has historically been cautious about spending too much on acquisitions. In a research note, Mogil speculated that Lionsgate's film troubles could accelerate a Starz merger.

ryan.faughnder@latimes.com

Copyright © 2016, Los Angeles Times
A version of this article appeared in print on March 23, 2016, in the Business section of the Los Angeles Times with the headline "Studio losing young-adult power - The fading `Hunger Games,' `Divergent' franchises point to Lionsgate challenges. - COMPANY TOWN" — Today's paperToday's paper | Subscribe
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