Lionsgate

Lionsgate continues to grow into a vertically integrated global content platform of increasing diversity, reach and scale. The Company’s portfolio of assets includes one of the largest independent television businesses in the world, a 17,000-title film and television library, a world-class film business and an expanding global distribution footprint.

says their investor website.   What is Lionsgate?  How do we value an entertainment company?

I’m interested in Lionsgate, because they have a majority ownership of 3 Arts

The management company where I am represented.  In a way, I work for them?

Here’s a brief history of Lionsgate – which is not very old – from this recent LA Times article by Ryan Faughnder, entitled

Founded in 1997 in Vancouver, Canada, the company became known early on for edgy indie and horror films such as “American Psycho” and “Saw.” Lionsgate grew its firepower and boosted its stock price through acquisitions, catapulting itself into the big leagues with its 2012 purchase of “Twilight Saga” studio Summit Entertainment and the release of the first “Hunger Games.” The four-movie apocalyptic “Hunger Games” series grossed $2.97 billion. It impressed investors with its tactic of offsetting the risk of producing movies by pre-selling foreign distribution rights and bringing in co-financiers.

Then they had some busts:

“Gods of Egypt,” a $140-million mythological epic released in 2016, flopped after it was slammed by critics and accused of whitewashing its cast. A reboot of billionaire Haim Saban’s “Power Rangers” franchise disappointed after Feltheimer said on an earnings call that the company could produce multiple films based on the kids series.The studio’s decision to turn the third book in the “Divergent” series into two movies backfired when “Allegiant” flopped. A planned fourth installment was never produced.

That LA Times article is entitled Lionsgate, the studio behind ‘Hunger Games’ movies, struggles in shifting Hollywood currents.  

The Wall Street Journal had a whack, too, a few days later:

Apparently they are, at the moment, attempting to salvage a huge and expensive turd:

Lions Gate faces a major challenge called “Chaos Walking.” The first of several planned adaptations of a series of young-adult science fiction novels cost around $100 million to produce but turned out so poorly it was deemed unreleasable by executives who watched initial cuts last year, according to current and former employees.

A scalding take:

I’m not sure how much Wall Street has built the disaster here into the stock’s price.

Sir John Templeton taught us to look for points of maximum pessimism.  Is Lionsgate an opportunity? How should we value an entertainment company, which is liable to have big swings and misses?

First, what does Lionsgate own?

Over the course of its life, Lionsgate scooped up a bunch of film companies, in the process acquiring a library.  They swallowed up:

• International Media Group

don’t know what their big movies were

• Sterling Home Entertainment
• Trimark Holdings

Their biggest franchise might be Leprechaun

• Modern Times Group
• Roadside Attractions

They produced, among others, Supersize Me, Manchester By The Sea, Mystery Team, Winter’s Bone, Mud

• Mandate Pictures

Juno, This Is The End

• Summit Entertainment

Hurt Locker, Red, Hellboy, John Wick, American Pie, Ender’s Game

• Artisan Entertainment

Blair Witch Project, Ninth Gate, House of the Dead, Step Into Liquid

From that library I have to imagine Lionsgate will continue to make some kind of money.  Some of these films are things people will want to see and resee or rediscover, and it’s a good business to keep selling something that’s already made.  All told, according to their 2018 investor letter, Lionsgate has something like 17,000 films in its library.

I was surprised by this fact:

In fiscal 2018, we shipped approximately 65 million DVD/Blu-ray finished units.

The Lionsgate investor page highlights some of their big ones:

The big engine at Lionsgate in Media Networks is Starz, the premium network.

Home to Outlander, Power, Ash vs Evil Dead, a bunch of costume-y looking shows.  Starz produces a lot of the profits:

Starz has performed well financially, with revenue increasing 4% to $366.8 million and profits up nearly 10% to $134.1 million in the fiscal third quarter ended Dec. 31. It added just over one million subscribers in 2018.

There was a writeup of Lionsgate in a recent issue of Graham and Doddsville, “an investment newsletter from the students at Columbia Business School.”  You can read it free, here.  Amit Bushan, Bruce Kim, and Stephanie Moroney won 1st place at the CSIMA Stock Pick Challenge with their case.

Above-consensus subs projection results in a 12% above-consensus NTM adj. EBITDA. Given the FCF stability of the subscriptionbased business, we are applying a premium over movie studios (~10x). Note that 12x multiple is 12% lower than Starz’s recent average (13.7x).  Catalysts: 1) higherthan-consensus OTT subs growth in the next few quarters; 2) increased visibility on the impact of the international expansion; 3) M&A.

Not sure I agree with this assessment.  But there are a couple points I think are interesting about Lionsgate.

• Starz is easy to add on to your Amazon Prime.  In addition to being its own channel, it’s like an add-on to your Amazon.  To me as a customer, that makes it very accessible.
• 3 Arts is cool, and represents a lot of top tier talent.  It’s kind of hard to find a list of their clients if you don’t have IMDb pro, but here’s the top ranked by “Star Meter”

Chris Evans	7
Jessica Alba	60	Michael Rotenberg – Manager
Patricia Arquette	78	Molly Madden – Manager
Rebecca Romijn	256	Molly Madden – Manager
Jeffrey Donovan	357	Michael Rotenberg – Manager Troy Zien – Manager
Natasha Lyonne	379	Dave Becky – Manager Cara Masline – Manager
Haley Lu Richardson	604	Molly Madden – Manager
Robert Pattinson	721	Nick Frenkel – Manager
Kevin Hart	786	Dave Becky – Manager
Jessica Paré	820	Nick Frenkel – Manager
Erin Moriarty	1,025	Sarah Shyn – Manager
Logan Marshall-Green	1,043	Nick Frenkel – Manager
Tyler Posey	1,047	Sarah Shyn – Manager
Rachel Bloom	1,081	Greg Walter – Manager
Peter Serafinowicz	1,128	Michael Rotenberg – Manager Nick Frenkel – Manager
Willa Holland	1,270	Nick Frenkel – Manager Sarah Shyn – Manager
Jeanine Mason	1,311	Sarah Shyn – Manager
Jamie Chung	1,319	Sarah Shyn – Manager
Aimee Carrero	1,347	Sarah Shyn – Manager
Patrick Warburton	1,353	Troy Zien – Manager
Amy Poehler	1,464	Dave Becky – Manager
Matt LeBlanc	1,481	Michael Rotenberg – Manager Troy Zien – Manager
Adam Pally	1,483	David Miner – Manager Greg Walter – Manager Josh Lieberman – Manager
Virginia Gardner	1,550	Troy Zien – Manager Sarah Shyn – Manager
Glenn Howerton	1,620
Chris O’Dowd	1,682	Nick Frenkel – Manager
Olivia Thirlby	1,816	Sarah Shyn – Manager
Dacre Montgomery	1,823	Lital Spitzer – Manager Nick Frenkel – Manager
Mindy Kaling	1,881	Howard Klein – Manager
Matthew Gray Gubler	1,882	Dave Becky – Manager
Terry Crews	1,903	Troy Zien – Manager
Debra Messing	1,961	Molly Madden – Manager
Maya Rudolph	1,966	Dave Becky – Manager
Charlie Day	2,136	Nick Frenkel – Manager
Tina Fey	2,157	Richard Abate – Manager David Miner – Manager
Kristin Chenoweth

What impact that will really have on 3 Arts’ bottom line, I’m not sure.  But they do have access and potential synergies with some pretty explosive entertainers and creators.

• The company has been profitable over the last four years:

As always around here, we like to look at a picture of the company’s CEO:

Here is John Feltheimer.  He gets paid a lot of money.

Is this company worth $2.8 billion dollars?

I’ll be interested to hear their fourth quarter earnings report on May 23.

Thank you for joining us on a continued journey to learn about business and entertainment.