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TheStreet Open House

Hunger Games Not Lions Gate's Only Blockbuster

NEW YORK ( TheStreet) - Lions Gate Entertainment (LGF) investors may have more important prey to feast on than Friday's release of The Hunger Games.

When - or if -- The Hunger Games excitement wears off investors may recognize that Lions Gate's stock surge began when the film studio acquired Summit Entertainment, the maker of the Twilight vampire movies. That deal may one day be seen as a driver of Lions Gate's profits as the studio broadens its revenue on improved international distribution, a larger movie library and the final installment of the hit vampire saga.

The Hunger Games, based on books by Suzanne Collins, arrives in theaters today.

In January, a vampire-hungry Lions Gate bought Summit Entertainment for $412.5 million in cash and stock, finalizing what was a long-rumored deal that gave the producer of Mad Men the rights to produce the last "Twilight" installment, in addition to library rights to its previous four blockbusters, which netted $2.5 billion in global box office receipts.

But according to the terms of the deal, Lions Gate only had to put up $55 million in cash, $50 million in stock and a $45 million debt offering. Most of the remaining price was paid with cash on Summit Entertainment's balance sheet, with Lions Gate also refinancing a $500 million term loan collateralized by Summit's assets. It means that earnings benefits may far outweigh the leverage increase that Lions Gate incurred with the deal.

"We think the recent acquisition of Summit Entertainment is complementary to the many strengths of each company (film and TV production, global entertainment distribution, and film libraries) and adds critical mass, as well as expertise in film production and international distribution," wrote BMO Capital Markets analyst Jeffrey B. Logsdon in a Mar. 20 note upgrading the company's price target to $14, but downgrading its outlook to "market perform."

Lion Gate's 2012 share rally began the first trading day after the Summit Entertainment deal, rising to its highest levels since Oct. 2008. In February, shares rallied to new all-time records as excitement began to mount on strong early ticket sale numbers for first installment of The Hunger Games movie trilogy based on a series of books written by Suzanne Collins and published by Scholastic (SCHL). The Hunger Games fever hit a crescendo in March, with both companies' shares rising nearly 20% in the past month.

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While on a current price-to-earnings basis Lions Gate may look expensive, many analysts project The Hunger Games-based earnings to justify higher stock prices. Overall, Lions Gate warrants a price target of $15.57, according to consensus estimates of analysts polled by Bloomberg.

"We believe the shares warrant a premium on strong growth prospects and dominance of the young adult audience. We believe key risks include execution on the Summit integration and execution on the launch and maintenance of its first truly major movie franchise," wrote Hudson Square Research analyst Marla Backer in a Mar. 20 note, who gives Lions Gate shares a $18 price target.

Even with a successful Hunger Games opening weekend, Lions Gate isn't expected to post big numbers in its upcoming quarterly earnings. The company is expected to see its revenue grow over 80% to $588 million on the movie release; however not everyone expects the company to a profit as it absorbs production and marketing costs. Analysts polled by Bloomberg expect Lions Gate to earn $19 million in first quarter profits, with some expecting a quarterly loss.

Summit Entertainment won't immediately drive Lions Gate's profits, according to BMO Capital Markets estimates. Instead, Summit Entertainment's library of movies, upcoming films and its distribution channels gives Lions Gate new long-term earnings benefits.

Summit Entertainment's library includes best-picture winning The Hurt Locker, RED, Knowing, Letters to Juliet and the Twilight Saga of films. It also brought adds the upcoming releases of the final Twilight film called Breaking Dawn Part 2 and a sci-fi film called Ender's Game, among others.

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