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Lionsgate Gets Credit Ratings Boost

19 Jan, 2012 By: Erik Gruenwedel

Lionsgate saw its credit ranking improve following the $412.5 million acquisition of Summit Entertainment, according to Standard & Poor's Ratings Services.

The ratings service gave Santa Monica, Calif.-based Lionsgate a ‘B-’ corporate credit rating on its debt and placed the minimajor on its CreditWatch with positive implications. The CreditWatch listing reflects the possibility of an upgrade, depending on the combined company's pro forma liquidity position, production strategy and acquisition orientation under the new structure.

In other words, Lionsgate — through the merger — has improved its creative capacity and clout with theaters, among other leverages, said S&P’s analyst Deborah Kinzer. In fiscal matters, the deal cut in half Lionsgate’s estimated lease-adjusted debt (including film financing obligations) to pre-tax earnings ratio.

In addition to securing the “Twilight” franchise, including upcoming Feb. 11 home entertainment release The Twilight Saga: Breaking Dawn — Part 1 and future theatrical and home entertainment releases for The Twilight Saga: Breaking Dawn — Part 2, the cash flow from those titles and the March release of The Hunger Games is expected to pay down any debt associated with the Summit purchase by the first half of 2015, analysts say.

The majority of the purchase price — announced Jan. 13 — was funded with cash on the balance sheet at privately held Summit. The remainder was funded with $55 million of existing Lionsgate cash, $45 million of cash received from a newly issued series of Lionsgate convertible notes, $50 million of Lionsgate common stock and an additional $20 million of cash or stock to be issued at Lionsgate's option within 60 days.

“While the combined company has greater cash flow visibility over the next few years, upon the completion of the ‘Twilight’ series, discretionary cash flow generation will depend on the future magnitude of production spend and success across other releases,” Kinzer wrote in Jan. 18 note.

The analyst said she would meet with Lionsgate management to discuss its combined operating outlook, financial policy and business strategy following completion of the acquisition. Key ratings considerations will include the combined company's pro forma liquidity position, production strategy and acquisition orientation under the new structure.

It remains unclear what role Steve Nickerson, president of Summit Home Entertainment, will play within Lionsgate going forward. Home entertainment, which includes physical and digital distribution, has produced strong revenue compared to Lionsgate’s struggling theatrical efforts. Co-COO Steve Beeks heads the home entertainment division.

A source close to the deal said no personnel decisions have been made.

“At least for the time being, it’s business as usual at Summit and at Lionsgate – it’s just that Summit is now a subsidiary of Lionsgate,” the source said. Ultimately, another source said, some type of integration will likely happen, but everything’s on hold at least until the Blu-ray Disc and DVD releases of “Breaking Dawn — Part 1.”

Regardless, the transactions portends a probable turnaround for Lionsgate, which lost $24.6 million in its most recent fiscal period. The studio saw home entertainment revenue from both motion pictures and television programming top $175 million, a 15% increase from the prior year’s second quarter, as syndication of the first four seasons of “Mad Men” on Netflix more than offset a limited release slate in home entertainment.

TV revenue reached a record $54.6 million, driven by electronic-media revenue from the syndication of “Mad Men” and the distribution of “Hell’s Kitchen,” as well as revenue from the release of "Weeds: Season 6" on DVD.
International television revenue increased 51% from the prior year’s second quarter, led by deliveries of “Mad Men” (seasons one, two, three and four) and “Weeds” (seasons six and seven). Revenue from Lionsgate’s digital business, which includes transactional video-on-demand, increased 123% to a record $65 million.


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