Making A Hollywood Deal

By Lori Craig

Attorneys explore landmark Lions Gate-Summit entertainment deal

It was the transaction that brought together Bella Swan and Katniss Everdeen, or at least the movie studios behind the iconic characters and hugely profitable film franchises.

The merger of Lions Gate Entertainment Corp., the studio behind “The Hunger Games,” and Summit Entertainment, which brought audiences three “Twilight” films, was the subject of a recent panel discussion at USC Law. Three attorneys who played key roles in the merger and an expert in digital and new media transactions joined moderator Prof. Michael Chasalow to explore the $412.5 million deal in depth and discuss factors that need to be considered in similar transactions.

The panel was sponsored by the USC Business Law Society and by the Marshall Partners, the student arm of the USC Marshall School of Business’s alumni association. An audience of about 70 students comprised about half business students and half law students, both J.D. and LL.M.

The Lions Gate-Summit deal was structured as a simultaneous sign and close, which requires that all parts of the merger — from due diligence to financing and Federal Communications Commission approval — happen at the same time. David Eisman, corporate partner at Skadden Arps who represented Summit in the deal, presented a timeline of the deal and discussed the steps in depth.

David Freidman

“In order for you to get to a ‘deal,’ there’s a lot of discussions that go back and forth over the period of — in this case — many, many months, in order for you to get to any timeline whatsoever,” Eisman said.

Summit and Lions Gate had been in talks on and off for more than three years, said David Friedman, former general counsel of Summit and current deputy general counsel of Lions Gate.

“After Summit had the success of the first ‘Twilight,’ not just Lions Gate but other parties all of a sudden took an interest in Summit, not surprisingly, because of the success of the film and the likely franchise,” Friedman said.

The studios couldn’t agree on a price at that time, nor could they after the success of the movie’s 2009 sequel. Two things helped the third round of talks last year: J.P. Morgan last spring refinanced Summit, restructuring and simplifying its shareholder structure; and in late 2011 Lions Gate ended its legal battle with Carl Icahn, the former shareholder who seemed poised to attempt a hostile takeover of the company.

Summit had already begun some due diligence, but at that point brought in Eisman and began documentation in earnest.

In a simultaneous sign and close, due diligence by the seller and the banks’ counsel starts right away and continues until signing, Eisman said, “in an attempt to get the buyer comfortable with the information about the company so they can set the purchase price, be comfortable with the transaction documents, and have a full and fair set of disclosure … so that at the end of the day there will be no surprises on either side.”

About 80 percent of the purchase price was funded by cash and about 20 percent by stock in escrow. One hot negotiation point, Eisman said, was earn-outs, or performance benchmarks at which extra cash or stock would be paid. In the end, earn-outs were based on the performance of the final two films in the “Twilight” franchise.

In general, simultaneous sign and close merger agreements are rare because it can be difficult to complete all the negotiation and financing at once. Most mergers and acquisitions involve signing before closing, allowing the buyer more time to get financing together, but also making the deal public once an agreement is signed.

Summit wanted to keep the deal quiet, which was one of the reasons they avoided a sign-then-close deal, Friedman said. But in Hollywood, little says quiet for long.

“Not only had the Lions Gate deal leaked months before we ended up closing, it was old news by the time it actually happened,” Friedman said. “There were a couple other parties that [Summit was] in active negotiations with, and we weren’t sure at the end of the day who would be able to come up with the financing and reach an agreement on purchase price.

(From left) Ramsey Hanna, William Hageman and Professor Michael Chasalow.

“It wasn’t a hostile situation, but there were other parties and that was one of the reasons that led to the simultaneous sign and close.”

Because all financing was needed at closing, J.P. Morgan and two other banks provided a bridge for much of the financing, said William Hageman, executive director at J.P. Morgan who advised Lions Gate in the deal.

After discussing the key points of the deal, the panelists took questions from students. Ramsey Hanna, corporate and venture law partner at Reed Smith, addressed the different roles filled by in-house and firm-based counsel.

“If you’re thinking about choices after graduating, I think starting with a law firm that has a relatively broad practice is probably not the worst move you can make,” Hanna said. Working with a firm is key for “getting exposure to a lot of different environments, finding out what appeals to you and is a good personality fit, and then figuring out if remaining in a law firm on a partner track is the right move for you — or if you want to looking for other opportunities that are better personality fits.”

Dean Robert K. Rasmussen, who opened the event, said that it demonstrates USC Law’s integration into the larger university community and the community of legal practitioners.

“It’s a great asset for us to have our location,” Rasmussen said. “It’s great to be able to call on some truly first-rate people to come in and share what it’s like to practice law at the highest level.”