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January 14th, 2012 via Bloomberg

Lions Gate Entertainment Corp. (LGF) acquired “Twilight” producer Summit Entertainment LLC for $412.5 million in cash and stock, uniting two of Hollywood’s largest independent studios.

Most of the purchase was funded with cash from Summit, Lions Gate said yesterday in a statement. Both film labels, run from Santa Monica, California, will remain active producers and the company expects to save money by combining some tasks.

The accord gives Lions Gate, maker of the “Mad Men” TV show and Tyler Perry films, the last installment of “Twilight” and library rights to the first four teen vampire movies. Ticket sales, home videos and TV rights may generate as much as $1 billion in free cash flow through 2012, Benjamin Mogil, a Stifel Nicolaus & Co. analyst, wrote on Jan. 9.

“The transaction is a net positive for all parties, but consolidation in the sector is reflective of the significant challenges in the industry,” said Amir Malin, managing principal of Qualia Capital LLC, a media investment company.

The announced terms suggest Lions Gate used about $240 million in cash from Summit.

The balance was financed with $55 million of Lions Gate cash, $45 million from new Lions Gate convertible notes, $50 million of Lions Gate common stock and an added $20 million of cash or stock to be issued at Lions Gate’s option within 60 days, according to the statement.

“We think it solidly positions us,” Lions Gate Vice Chairman Michael Burns said in an interview. “It extends our reach dramatically. It increases the size of the library.”

The new company will realize savings from consolidation of support operations, Chairman and Chief Executive Officer Jon Feltheimer said. Details were still being worked out, he said.

New Roles

Summit’s top executives, Co-Chairman and Chief Executive Rob Friedman and Co-Chairman and President Patrick Wachsberger, said in an interview they will continue to run Summit.

“We have a business that is very active and ongoing,” Friedman said. “We’re continuing to operate that business. We are working very closely with our colleagues at Lions Gate to make this a seamless merger.”

The owners of Summit formed the studio in 2007 with $1 billion in funding from Merrill Lynch & Co. Last year, the company raised debt financing for movie making and to pay a dividend to owners including Rizvi Traverse Management LLC. Friedman and Wachsberger are also owners.

Summit’s existing $500 million term loan was refinanced and secured by its assets, Lions Gate said yesterday, adding it plans to repay the loan from cash flow before the 2016 maturity.

‘Twilight’ Bonanza

Closely held Summit had been negotiating exclusively with Lions Gate for more than a week. The studio also held talks with Tom Barrack’s Colony Capital LLC, which owns the the Miramax film library.

The first four “Twilight” films, based on the novels by Stephenie Meyer, have generated $2.5 billion in worldwide ticket sales, according to researcher Box Office Mojo. Lions Gate would also add Summit’s Oscar-winning Iraq war drama “The Hurt Locker” to its library of 13,000 films and shows.

Lions Gate, known for R-rated horror films like the “Saw” movies, is trying to break into the youth-fantasy genre dominated in recent years by the “Twilight” and “Harry Potter” films.

The studio will release the first of four planned films based on Suzanne Collins’s “The Hunger Games” young-adult novels in March. Lions Gate also owns rights to the “Chaos Walking” young-adult books by Patrick Ness.

Cross Promotions

The company will be able to promote “Hunger Games” sequels in theaters when the final “Twilight” installment reaches cinemas in November, Burns said.

“That’s an enormous increase in reach,” he said.

Lions Gate, based in Vancouver, fell 1.3 percent to $8.60 yesterday in New York. The stock gained 28 percent in 2011.

Hollywood studios just concluded a year in which U.S. cinema attendance declined 4.2 percent to a 16-year low.

Consumer spending on DVD rentals, Blu-ray discs and streaming services fell 2.1 percent to $18 billion in 2011, the industry backed Digital Entertainment Group said this week.

JP Morgan, Barclays Capital and Jefferies were Lions Gate’s financial advisers and led financing arrangements.

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