At Lion's Gate, It's Only Intermission


By Ronald Grover With his shirt sleeves rolled up, munching french fries at lunch recently at Delmonico's near Century City, Jon Feltheimer, the 51-year-old chief executive of Lion's Gate Entertainment, looked every bit the Wall Street denizen. In fact, "Felt" -- as he's known to pals -- more than just looks the part. He arrived in Hollywood more than two decades ago after first trying his hand as a stockbroker. Now, he's a dealmaking Hollywood mogul, thanks to his Oct. 27 announcement that Lion's Gate will pay $160 million in cash and assume the debt of privately held Artisan Entertainment.

It isn't the price tag that makes the deal so huge -- after all, that's roughly what Universal Pictures spent to make and promote its none-too-spiffy summer flick The Hulk. But the purchase will make Lion's Gate (LGF) a powerhouse in the downsized world of independent studios. And while Felt is loath to admit it just yet, it also makes Lion's Gate a potential takeover target for major distribution players -- think Comcast (CMCSA) -- looking for tons of content to fill those digital channels.

BIG BACKERS. Even before snagging Artisan, Feltheimer had a fan club of heavy hitters. Among Lion's Gate's major investors are high-tech billionaires Mark Cuban and Paul Allen, who controls struggling cable operator Charter Communications (CHTR), along with Gordie Crawford, Capital Group's money manager and one of media land's most influential moneymen.

Why would so many big fish line up with Lion's Gate, which last year had revenues of just $301.8 million? It's not to get invited to splashy parties. After all, among Lion's Gate's releases this year will be the $6 million Shattered Glass, about overly inventive reporter Stephen Glass, and a William Macy vehicle, The Cooler, about the unluckiest guy in Vegas. No, the players are on Felt's team because they've all bought into his vision of making Lion's Gate the premier producer of smaller-budget films.

Lion's Gate is more than that now. Thanks to the Artisan deal, it now has a library of more than 8,000 titles. True, only a few, such as Terminator 2 and Monster's Ball, are really A-list material. But the content is only one reason the Street already loves the Lion's Gate/Artisan deal, which is expected to be accretive to Lion's Gate's earnings when it closes, probably late this year. Feltheimer is known for keeping overheads low. He'll likely lay off a small army of film executives, and he intends to keep production down to about 20 films a year -- most of them well under $20 million. Lion's Gate was profitable last year, and it intends to step up the class a bit next year with movies starring Robert DeNiro and Robin Williams.

"MULTIPLE BENEFITS". How does all this affect the stock's prospects? The merger "has multiple benefits," writes SG Cowen analyst Lowell Singer, who rates the stock outperform. He cites "improved bargaining power with customers and distributors" and opportunities to "realize meaningful cost savings."

That's all well and good. Feltheimer, however, describes the deal more simply, saying: "We took the only two gas stations on the corner and combined them." And now, only Lion's Gate and MGM (MGM) stand out as film outfits that don't have large media parents. And Lion's Gate, with a market cap of about $225 million, is a far cheaper buy than MGM, which the market currently values at close to $4 billion. (MGM does come with about 4,000 films, including the James Bond series and some recent big hits like Legally Blond and Barbershop.)

For an outfit eager to fill its pipeline with tons of films, Lion's Gate would be the perfect fit. Among the possible suitors, writes analyst Robert G. Routh of Natexis Bleichroeder in a recent report, are Comcast, John Malone's Starz pay channel, or maybe MGM itself.

MORE DEALS TO COME? Feltheimer probably still has some building of his own to do. For starters, he says, he might go looking for his own cable channel -- the Sundance and Independent Film Channel come to mind, although both may be a little too pricey. And he'll likely swing a deal with Cuban's two-year-old HDNet to put some of Lion's Gate's flicks on the high-definition channel now being offered by DirecTV, Allen's Charter system, and a few other outlets. In an e-mail, Cuban says he bought into Lion's Gate last year "because they have a strong management team, and I saw possibilities of synergies with HDNet."

For now, Feltheimer says he has no interest in selling out to a bigger concern and instead is focusing on putting out as many of his titles as possible for the booming DVD market. After that, he says he wants to take advantage of the broadband revolution. Not surprising, given that Lion's Gate also owns a 57% stake in CinemaNow, an online site for downloading movies that Feltheimer figures will find a way to offer movies-on-demand via TV.

As for a sale, Feltheimer says "give me six months." That's a joke, perhaps, but the CEO's history is peppered with major deals, including helping to sell New World Entertainment to Sony (SNE) (where he headed TV operations) and then putting the deal together for Sony to sell its stake in the Hispanic TV network Telemundo to NBC (GE).

"ANYTHING IS POSSIBLE". At Lion's Gate, which he joined in 2000, he also didn't waste much time, buying independent studio Trimark Holdings for $49.6 million in stock and cash. And he had been after Artisan for more than two years.

Now that he has snagged it, I suspect Felt will keep his sleeves rolled up searching for his next deal. "Anything is possible," writes investor Cuban in his e-mail. I suspect that's a vision that Feltheimer shares. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online


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