2. December 2011 BLOOMBERG MARKETS 45
PHOTOGRAPH BY BRENT HUMPHREYS
BY EDWARD ROBINSON AND MICHAEL WHITE
THE INDEPENDENT STUDIO THAT REPELLED CARL ICAHN’S
HOSTILE TAKEOVER IS PRODUCING ITS PRICIEST MOVIE
YET—THE HUNGER GAMES—TO LEAD A COMEBACK.
Lions Gate CEO Jon
Feltheimer, left, and Vice
Chairman Michael Burns are
betting that The Hunger
Games becomes a franchise.
3. COURTESYOFLIONSGATE
46 BLOOMBERG MARKETS December 2011
SHOWTIME FOR LIONS GATE
JonFeltheimerandMichaelBurnscrank
upthevolumeasanimageflickerstolife
onaflat-screenTVintheirofficesatLions
Gate Entertainment Corp. in
Santa Monica, California.
For years, Lions Gate’s two
bosses have searched for a
breakout franchise of movies
to allow the independent stu-
dio to thrive in an industry
dominated by behemoths such
as Walt Disney Co. and Time
Warner Inc.
On this August afternoon,
the two men watch a 60-second
trailer for what they say is their
best hope—The Hunger Games.
It’s set in a dystopian future
whereatotalitarianstateforces
24 teens to duel to the death on
national television. On screen, a
16-year-old girl runs through a
dark forest as fireballs explode
inthetreesaroundher.Shefires
an arrow and it morphs into a
fiery logo for the $80 million
movie—Lions Gate’s biggest
productionever—scheduledfor
a March 23 release.
“Hey, we’ve got something really spe-
cial here,” says Feltheimer, 60, Lions
Gate’s co-chairman and chief executive
officer.Burns,53,thestudio’svicechair-
man, praises Jennifer Lawrence, the
21-year-old actress who plays the film’s
bow-wielding heroine. “She looks like
she could start a revolution,” he says.
Inanerawhenblockbustersreleased
by the six major studios have little im-
pact on the share price of their parent
corporations, Lions Gate offers inves-
tors the chance to bet on the perfor-
mance of a single movie. The studio,
which operates out of a plain five-story
building, doesn’t have amusement
parks and cable networks to keep it
going. It rises and falls with the release
of every movie or TV show.
“All the major studios are subsumed
within multinational media conglom-
erates, so even the phenomenal results
of a Harry Potter are unlikely to move
the stock of Time Warner,” says David
Molner, the founder of Screen Capi-
tal International Ltd., a Beverly Hills,
California–based firm that financed
Oliver Stone’s W. “Lions Gate doesn’t
have a lot of places to hide its results.”
Thestudio,bestknownforproducing
the Emmy Award–winning series Mad
Men, needs a hit. It has lost money
for four straight years, and in 2010 it
fought off a hostile takeover bid by
Carl Icahn, the billionaire hedge-fund
manager. With Hollywood’s fortunes
driven by moviegoers ages 12 to 24,
Feltheimer and Burns are counting on
The Hunger Games to become a jugger-
naut like the Twilight series. The teen
vampire movies have generated more
than $2.3 billion in global box office and
DVD revenue, according to The Num-
bers,afilmindustrywebsite.“Wewould
be disappointed if we didn’t make three
or four movies,” Feltheimer says.
So would investors, who have seen
Lions Gate stock drop 45 percent in
its four fiscal years ended on March
31. The Hunger Games and three po-
tential follow-ups could generate from
$220 million to as much as $733 mil-
lion in earnings before interest, taxes,
Jennifer Lawrence stars in
The Hunger Games, where
teens must duel to the death.
4. December 2011 BLOOMBERG MARKETS 47
RICKMAIMAN/BLOOMBERG
SHOWTIME FOR LIONS GATE
DefeatingCarlIcahn
The activist shareholder waged a battle to
take over Lions Gate and lost.
OCTOBER2008: Icahn buys 9% stake in
studio; price eventually averages $6.90
a share.
MARCH2009:After studio loses $93 mil-
lion, Icahn seeks board seats and buys
more shares.
APRIL2010: Icahn mounts proxy contest
to unseat management and place five allies
on the board.
JULY: Lions Gate dilutes Icahn’s voting
power by issuing 16 million new shares to
ally Mark Rachesky.
JULY: Icahn sues studio in U.S. and
Canadian courts to block Rachesky from
voting shares.
DECEMBER: Lions Gate wins court rulings
and Icahn loses proxy contest as stock-
holders elect management’s slate.
AUGUST2011: Icahn agrees to sell stake
at $7 a share, making about $4 million
on paper, and he and studio later end
pending litigation.
Sources: Bloomberg, court records, SEC filings
depreciation and amortization during
the next several years, according to fore-
casts by James Marsh, an equity ana-
lyst at Piper Jaffray & Co. in New York,
who rated the stock a “buy” as of mid-
October. The high-end forecast would
amount to three-quarters of the stu-
dio’s market capitalization of $975 mil-
lion as of Oct. 10. “The Hunger Games
could be the biggest catalyst for Lions
Gate’s profits and share price during
the next decade,” Marsh says. “It could
be a game changer for them.”
A smash would rebut Icahn’s accusa-
tions that Feltheimer and Burns were
profligate managers who wasted capital
onbig-ticketmoviesandharmfulacqui-
sitions. After Icahn amassed more than
37 percent of Lions Gate’s stock, he
soughtlastyeartoreplacetheboardand
jettison the two studio heads.
Feltheimer, who helped launch the
beloved sitcom Mad About You as the
head of Sony Corp.’s worldwide TV pro-
duction business in the 1990s, assured
stockholders that the studio’s deals and
ambitiousslateofmoviesandTVshows
would pay off. And Burns, a one-time
head of Prudential Securities Inc.’s Los
Angelesmediainvestmentbankingunit,
executed a financial chess move that di-
luted Icahn’s voting power. Icahn lost
hisproxycontestinDecember2010and
failed to place even one director on
Lions Gate’s 12-member board. Nine
monthslater,inAugust,Icahnagreedto
sell all of his Lions Gate stock for $7 a
share, 10 cents more than his average
cost basis of $6.90, yielding a paper
profit of about $4 million.
LionsGatehasbetbigonso-calledtent
pole movies before and come up empty,
says David Miller, a Los Angeles–based
equity analyst at Caris & Co. In August,
thestudioreleasedConantheBarbarian,
a $90 million, 3-D reboot of the swords
and sorcery epic that launched Arnold
Schwarzenegger’s career in the 1980s.
The studio’s hopes that Conan would
spawn sequels died after it brought in a
meager $21 million in the U.S. While Li-
ons Gate shared the pain with financial
partners, its next two releases—Warrior,
a gritty father-and-son drama set in the
world of mixed martial arts fighting, and
Abduction, a $35 million action movie
starring 19-year-old heartthrob Taylor
Lautner—were also disappointments at
the box office. Miller says Lions Gate’s
cold streak puts more pressure on The
HungerGamestodeliver.
“Conan was an unmitigated disaster,”
saysMiller,whoratedLionsGateshares
a“sell”asofmid-October.“Ifyoufollow
this company closely, you’ll see it’s al-
ways the next movie that becomes the
reason to buy the stock. If Hunger
Games doesn’t work, the stock is going
to take a big hit.”
FeltheimerandBurnshavereasonto
be optimistic. The movie is based on
the first volume of a trilogy with 12 mil-
lion copies in print in the U.S. and
editions in 44 foreign markets, ac-
cording to Scholastic Inc., the book’s
New York–based publisher. Author
Suzanne Collins’s teen protagonist,
Katniss Everdeen, who dispatches her
enemies with cunning and violence
even as she experiences her first
romance, has inspired scores of fan
websites, blogs and Facebook pages.
The Marlborough School, a private
academy for girls in grades 7 through
12 in Los Angeles, is one of many that
ASMASHHITWOULDREBUTICAHN’SACCUSATIONS
THATFELTHEIMERANDBURNSWERE
PROFLIGATEMANAGERSWHOWASTEDCAPITALON
BIG-TICKETMOVIES.
5. COURTESYOFLIONSGATE
48 BLOOMBERG MARKETS December 2011
SHOWTIME FOR LIONS GATE
LionsGate:
HitsandMisses
THEEXPENDABLES
2010
Mercenaries team up
in Sylvester Stallone’s
action flick.
$103 million
MADMEN
2007
Risque TV series about
Madison Avenue be-
comes pop culture
phenom.
$200 million for
DVD, streaming
DIARYOFAMAD
BLACKWOMAN
2005
Tyler Perry’s Madea is
a comic smash.
$257 million
for franchise
THESPIRIT
2008
Ghostly superhero
scares off moviegoers.
$20 million
ABDUCTION
2011
Taylor Lautner action
vehicle runs out of gas.
$26 million
CONANTHE
BARBARIAN
2011
Swords and sorcery
epic slain at
box office.
$21 million
have added the books to their read-
ing lists.
Burns,alankymanwithaboyishface
that belies his taste for corporate com-
bat, says the movie offers Lions Gate
that most coveted Hollywood prize: a
reservoir of revenue that can be tapped
for years. “Everyone is looking for sta-
bility in this business, so if the first one
works, then you should have three
more that work, and you create pre-
dictabilityinaveryunpredictablebusi-
ness,” Burns says in his rat-a-tat style.
Feltheimer, whose chiseled jaw and
deep-set eyes could get him cast in a
Western, nods in agreement. He says
The Hunger Games must hit $100 mil-
lion in domestic box office sales to
justify making sequels. “I’m not too
concerned we won’t get to that kind
of number,” the studio head says. He
points to an issue of Entertainment
Weekly magazine on a coffee table. It
features two of the film’s hunky young
stars,JoshHutchersonandLiamHems-
worth, on the cover. “There’s just too
much heat for this property
around the world,” he says.
Burns squirms at his part-
ner’s confidence. “Can I just
knock on wood through this
entire interview?” he says,
rapping the side of his chair.
Founded in 1997 in Van-
couver by a movie-loving
Canadian mining financier
named Frank Giustra, Lions
Gate made its name producing and dis-
tributing edgy R-rated fare such as
American Psycho, the 2000 sleeper
starring Christian Bale as a Wall Street
serial killer. The studio, which went
public in 1997, consistently lost money.
When Feltheimer and Burns took
charge in March 2000, they set out to
make it profitable by acquiring other
small studios and film libraries and
selling DVDs and telecast rights to ca-
ble and broadcast channels. “The core
of our original strategy was to build a
library,” Burns says. “We liked the an-
nuity aspect of the income. It’s the gift
that keeps on giving.”
By 2006, the duo also snared their
firstAcademyAward.Theurbandrama
Crash won for best picture. The Oscar
sits gleaming on a credenza in Felt-
heimer’s office.
Feltheimer had tapped a wiry young
production executive named Kevin
Beggs to lead a push for original TV
programming in the then-unexplored
wilderness of basic cable. In 2006, a
script brimming with workplace sex
penned by Matthew Weiner, a writer on
HBO’s mobster series The Sopranos,
landed on Beggs’s desk. It was called
MadMen,andBeggsandFeltheimerfell
in love with its depiction of the martini-
soaked world of Madison Avenue in the
early 1960s. Still, concerned that the
show wouldn’t sell overseas, Beggs
passed on making the pilot. So did HBO.
Undeterred,AmericanMovieClassics,a
Figures are U.S. box office. Sources: Box Office
Mojo, Lions Gate, The Numbers
Sylvester Stallone, top,
directs and stars in The
Expendables; Eva Mendes as
a femme fatale in The Spirit.
6. JEFFVESPA/GETTYIMAGES(TOP);JEFFKRAVITZ/GETTYIMAGES;COURTESYOFLIONSGATE
50 BLOOMBERG MARKETS December 2011
SHOWTIME FOR LIONS GATE
cable haven for old Westerns, went
ahead and made the pilot and sent it to
studios.BeggsandFeltheimerwerewon
over by the show’s risque themes and
hastilyconsummatedaproductiondeal.
“It had its risks, but we saw the quality,”
saysBeggs,45,aCalifornianwhostarted
his production career on the bikini and
beefcake series Baywatch. Mad Men
wouldgoontobecomethestudio’sNo.1
TVprogram,generating$200millionin
streaming rights and DVD sales for its
first four seasons.
At the close of fiscal 2007, the studio
raked in $257 million in sales from li-
censing the 11,800 movies and TV epi-
sodes in its library compared with
almost $40 million on the 1,500 titles it
controlled in 2001. The studio’s two
most valuable franchises—the Saw se-
ries of horror films and Tyler Perry’s
comic Madea movies chronicling
African-American life—helped it re-
cord a third consecutive year of profit-
ability. Lions Gate’s shares jumped
sixfold from March 31, 2003, to March
31, 2007, or to $11.42 a share from $1.91.
“I initially thought of Lions Gate as a
library rollup play, but surprise, sur-
prise, they ended up being creative con-
tent guys,” says Gordon Crawford, a
portfoliomanageratCapitalResearch&
Management Co. in Los Angeles, which
holds a 9 percent stake in Lions Gate.
By 2008, Icahn had started accumu-
lating shares in Lions Gate as Felt-
heimer and Burns expanded beyond
their original content strategy and into
cableTV.ThatApril,theycommittedto
invest up to $43 million in a subscrip-
tioncablechannelcalledEpixaspartof
a three-way joint venture with Metro-
Goldwyn-Mayer Inc. and Viacom Inc.’s
Paramount Pictures. And in March
2009, Lions Gate paid $255 million in
cash to buy the TV Guide Network and
TVGuide.com from Macrovision Solu-
tions Corp., a Santa Clara, California–
based software maker.
FeltheimerandBurnsmadethedeals
todelivertheirmoviesandTVprograms
through alternative channels as DVD
sales started falling industrywide. The
studio tapped a $340 million credit line
to pay for the TV Guide Network and
website, and its debt in fiscal 2009
jumped69percentto$557millionfrom
the prior year. It was bad timing, as the
credit crunch drove the economy into a
recession.Infiscal2009,LionsGatelost
$178millionon$1.5billioninsalesafter
a flurry of flops such as The Spirit, a
movie about a ghostly superhero. Lions
Gate’s stock sank to a five-year low of
$3.90 on Feb. 10, 2009. Icahn saw his
opening and pounced.
In letters to Lions Gate’s board and
shareholders during the next year, he
criticized management for wasting
more than $235 million on money-
losingassetssuchasEpix,TVGuideand
FearNet,acablechanneldevotedtohor-
ror movies. Icahn issued a series of ten-
der offers to buy up big chunks of Lions
Gate stock. In April 2010, he indicated
he would try to unseat Feltheimer and
Burnsfromboththeboardandtheexec-
utive suite and install his own allies as
directors and senior management. “I
Mad Men star Jon Hamm,
at right in photo, with
Lions Gate’s Kevin Beggs;
below at left, heartthrob
Taylor Lautner and the
studio’s Joe Drake
ShootingforaBlockbuster
LIONS GATE SOLD INTERNATIONAL RIGHTS TO THE HUNGER GAMES
TO OFFSET THE RISK OF ITS INVESTMENT IN THE FILM.
*Piper Jaffray analyst James Marsh’s forecast. **Marsh’s forecast of earnings before interest, taxes,
depreciation and amortization. Sources: Lions Gate, Piper Jaffray reports
PRODUCTION
INVESTMENT
$30MILLION
Lions Gate’s
investment backs an
$80 million project
featuring special
effects and
spectacular action
sequences.
1
SELLING
DISTRIBUTION
RIGHTS
$50MILLION
Executives hedged
the financial risk by
selling international
distribution rights to
other media players.*
3
MARKETINGAND
ADVERTISING
SPENDING
$40MILLION
Studio may spend
$40 million on TV
and newspaper ads,
social media and
other promotions.
2
Lions Gate could reap
big profits from box
office and home
entertainment sales
if the movie is
a hit.**
PROFIT
$105MILLION
4
Liam
Hemsworth
co-stars with
Lawrence in The
Hunger Games.
7. BRENTHUMPHREYS(LEFT);KMAZUR/GETTYIMAGES(SHEARMUR);MATTHEWSTAVER/BLOOMBERG(CRAWFORD)
52 BLOOMBERG MARKETS December 2011
SHOWTIME FOR LIONS GATE
Burns, left, and
Feltheimer
take in The
Hunger Games’
fiery logo.
Alli Shearmur, left, realized
the appeal of The Hunger
Games to young adults;
Gordon Crawford has a
9 percent stake in the studio.
think profligate spending has taken its
toll on Lions Gate’s share price,” Icahn
wrote to Feltheimer in a letter on April
15, 2010. He declined to comment for
this article.
Feltheimer and Burns countered
that Icahn wanted to withdraw from
production and focus solely on distrib-
uting films to theaters, an approach
that would unravel the studio they’d
been building for a decade. “Under
Mr. Icahn’s proposed direction, Lions
Gate would give up its movie busi-
ness and its highly profitable TV busi-
ness, both of which replenish Lions
Gate’s library,” they wrote in a let-
ter to shareholders on that April 21.
On July 9, 2010, the two sides agreed
to a 10-day truce to jointly explore
whetheraLionsGatemergerwithstrug-
gling MGM might benefit shareholders.
No deal emerged; yet, Burns used the
lull to engineer a critical debt-for-
equity swap, according to court records
filed in subsequent litigation. Shortly
after the cease-fire expired at midnight
on July 20, the studio’s board approved
a transaction in which Lions Gate ex-
changed about $100 million in con-
vertible debt held by Kornitzer Capital
Management Inc., a Shawnee Mission,
Kansas–based investment firm, into
new notes. Kornitzer sold the notes to
MHR Advisers LLC, a New York hedge
fund controlled by Mark Rachesky, a
one-time protege of Icahn’s who had
thrown his support to Lions Gate man-
agement. Rachesky converted the notes
into more than 16 million new equity
shares at $6.20 each, well below Icahn’s
latest tender offering of $7.
As a result, Icahn’s 37.2 percent stake
in Lions Gate was diluted to 32.8 per-
cent, while Rachesky’s position swelled
to28.8percentfrom19.2percent.Along
with the support of other allies, Felt-
heimerandBurnscouldcounton43per-
centof Lions Gate’s voting shares.
Icahn decried the move as a breach of
his standstill agreement with Lions
Gate to refrain from such action during
the 10-day truce. He sued in New York
and Vancouver, where Lions Gate is in-
corporated,toblockRacheskyfromvot-
ing his shares. Lions Gate said the swap
was simply designed to retire debt.
After Icahn lost rulings in both
courts, the studio’s shareholders in De-
cember 2010 re-elected Feltheimer
with 96 percent of the vote. And in Sep-
tember 2011, Rachesky, who has been a
Lions Gate director since 2009, was
named co-chairman.
8. COURTESYOFLIONSGATE
54 BLOOMBERG MARKETS December 2011
SHOWTIME FOR LIONS GATE
Hollywood player that does it all, from
producing and distributing movies
and TV shows to running cable net-
works. Epix is now profitable after its
controlling partners negotiated a
$1 billion deal to stream its movies on
Netflix Inc.’s website. And anchored
by Mad Men and Weeds, a series about
a marijuana-dealing soccer mom, the
studio’s TV revenue has tripled in the
past four years, to $353 million in fis-
cal 2011.
Yet the executives are struggling
with movies, which made up 77 per-
cent of the studio’s $1.6 billion in sales
last year. After several box-office
bombs from Lions Gate, its long-
suffering shareholders are now count-
ing on it to deliver a blockbuster.
“Patience is running out,” Caris’s
Miller says. Feltheimer and Burns find
their studio’s fortunes riding on the
shoulders of a 16-year-old girl fighting
for her life.
EDWARD ROBINSON IS A SENIOR WRITER AT
BLOOMBERG MARKETS IN SAN FRANCISCO.
EDROBINSON@BLOOMBERG.NET
MICHAEL WHITE COVERS ENTERTAINMENT
AT BLOOMBERG NEWS IN LOS ANGELES.
MWHITE8@BLOOMBERG.NET
To write a letter to the editor, send an e-mail to
bloombergmag@bloomberg.net or type MAG <Go>.
As the takeover fight raged, Alli
Shearmur, Lions Gate’s president of
movie production, had zeroed in on a
hot property making the rounds in
Hollywood: The Hunger Games (Scho-
lastic Press, 2008). She gave copies to
Feltheimer;Burns;herboss,JoeDrake,
president of Lions Gate’s motion pic-
ture group; and other studio execu-
tives. They were immediately smitten
bythestoryofhowtheresourcefulKat-
niss Everdeen fights for her survival in
the lethal games of the title. News
Corp.’s Twentieth Century Fox and
other major studios were also circling
the book.
When Drake and Shearmur pitched
author Collins and independent pro-
ducerNinaJacobsonfortherightsinlate
2008, they vowed to make a character-
driven story that would resonate with
young readers. “We weren’t going to let
the violence be gratuitous or the selling
point of the franchise,” says Shearmur,
who oversaw the Bourne series starring
Matt Damon while she was an executive
at Universal Pictures Ltd. in 2002. “This
is an emotional story about a young girl
who sacrifices everything and sets off a
revolutionsheneverintended.”
Drake also pledged that, unlike ma-
jorstudios,whichoftenshelveprojects,
Lions Gate would make the picture.
“We certainly sold the legacy of scripts
and great books never seeing the light
of day,” Drake says.
IngreenlightingLionsGate’spriciest
picture ever, Feltheimer hedged the fi-
nancialriskbysellingtheinternational
distribution rights, except for the U.K.,
to other studios. Piper Jaffray’s Marsh
estimates that Lions Gate collected
$50 million in upfront cash from the
deals in exchange for permitting its
partners to pocket box office sales in
foreign markets. After receiving tax in-
centives from North Carolina, where
the film was shot this summer, Lions
Gate has about $30 million at risk in
the production, Feltheimer says. The
studio will probably spend another
$40 million in marketing and adver-
tising The Hunger Games, he says.
For 11 years, Feltheimer and Burns
have labored to turn Lions Gate into a
Lawrence
performs at the set
in North Carolina.
You can use the Bloomberg Industries dashboard for diversified entertainment
to compare Lions Gate’s share of the U.S. and Canadian filmed entertainment
market to that of other studios. Type BI DVEN<Go>. Click on Market Share
under Data Library on the left side of the screen. Click on the Filmed Entertain-
ment tab at the top of the screen for a table that shows annual revenue at the
major studios. Click on the Mkt Shr button to display the companies’ revenues
as a percentage of the whole market. For the latest box office results, click on
the icon to the right of Domestic Weekend Grosses. JON ASMUNDSSON
COMPARING
LIONS GATE
BloombergTıps
‘IFTHEFIRSTONEWORKS,THENYOUSHOULD
HAVETHREEMORETHATWORK,AND
YOUCREATEPREDICTABILITYINAVERY
UNPREDICTABLEBUSINESS,’BURNSSAYS.
