Smaller Film Studio Hopes to Pounce on MGM

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Could a potential merger between two lions of the film industry have investors roaring with excitement?

Since Lions Gate Entertainment Corp. announced last month that it was interested in acquiring Metro-Goldwyn-Mayer, the storied studio with a lion logo, Lions Gate’s stock has climbed almost 12 percent to $5.79.

Lions Gate, with dual headquarters in Santa Monica and Vancouver, British Columbia, has a market cap of less than $700 million. As such, it’s seen as a dark horse candidate in the competition to acquire MGM, which is valued at more than $2 billion.

But if the smaller studio can pull off the deal, it could be quite a score, said Matthew Harrigan, an analyst with Wunderlich Securities in Denver.

“You could argue that it would be a positive if things worked out, that the deal would have a lot of upside,” he said.

MGM, the studio behind the James Bond franchise, has sent confidentiality agreements to 20 potential buyers including Lions Gate, Time Warner Inc. and News Corp. Lions Gate executives said Nov. 12 that they would be interested in acquiring the studio.

But investors have some concerns about Lions Gate acquiring the larger MGM. Analysts said Lions Gate would likely either have to secure a significant loan, thus increasing the company’s debt, or enlist a larger studio as a partner to afford the deal. Investors are concerned that either scenario could dilute the value of Lions Gate stock.

“It’s very hard to bootstrap these kinds of deals when you’re a small company,” Harrigan said.

Lions Gate would also likely need the cooperation of activist investor Carl Icahn, who owns a $128 million stake in Lions Gate. It’s unclear if Icahn would be interested in helping Lions Gate with the deal.

MGM is owned by a group that includes Sony Corp.; Providence Equity Partners, a private equity firm; and Comcast Corp. The group bought MGM in 2004 for nearly $5 billion, which included nearly $2 billion in debt. MGM now has about $4 billion in debt.

The upswing in Lions Gate stock comes after a share price decline. Harrigan said a large institutional owner had sold several million shares over the course of a month, which drove down the value of the company’s stock. He declined to name the seller.

That in turn sparked fears among other investors, leading to a broader sell-off.

As a result of the sell-off, Harrigan said investors may have seen Lions Gate stock as undervalued, making it a good time to jump back on board.