Lions Gate Entertainment (LGF) describes itself as a global entertainment company with a diversified “presence” in motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, digital distribution and what the company calls “new channel platforms”. Effectively, the company creates primarily video-based content that it sells in various ways.

It has produced a roster of very successful titles, including such well-known hits as Mad Men and Weeds in the television realm and The Hunger Games and Precious in the movie space. These recent success stories are backed up by a library of about 13,000 movies and television episodes that Lions Gate distributes directly to retailers, via rental kiosks, as well as through pay and free television channels.

The company has numerous partnerships and ownership interests in other content creators. In fact, Lions Gate’s website proudly proclaims that the past 10 years has seen the company grow “its theatrical box office market share tenfold, the size of its library 15 times over and its television revenues by a multiple of 50…” While these are impressive statistics, the company’s debt load has also grown over 20 fold, and recently made up over 95% of its capital structure. The obvious risks of such a high debt load aside, there have been a number of very important acquisitions in this time, including TV Guide Network (a significant stake in this entity was sold, making it a partnership), Artisan Entertainment and Trimark Holdings. 

Interestingly, Lions Gate, though public, has several large shareholders that make it somewhat akin to a partnership itself. Mark Rachesky, M.D., owns nearly 30%, while Capital Research Global Investors own 9%. So, with a combined state of almost 40%, these two shareholders are likely to have a disproportionate say in the business.

Such large owners can be beneficial since their finances are likely tightly connected to the performance of the company. That said, it is possible that decisions could be made that favor these large owners to the detriment of public shareholders. So, there is a double edge to this sword.

Lions Gate operates in very competitive markets with large and well-heeled competitors, including such industry giants as Paramount Pictures, Sony (SNE), Twentieth Century Fox, Universal Pictures, Warner Bros., and Disney (DIS - Free Disney Stock Report). There are a number of smaller industry participants, as well. Although there are material barriers to entry in the market, since creating and producing quality video content is expensive, the costs are not prohibitive. Indeed, using one business segment as an example, many of the most profitable movies were, in fact, the cheapest to produce, benefiting mightily from consumers’ fickle tastes.

Consumer taste is an important factor in Lions Gate’s business, since content consumption is driven by this quick changing factor.  If a movie, television series, or other content is poorly received, the costs of creating and marketing it could, effectively, be lost. Conversely, if consumers find a given move (or other content the company creates) appealing, such as The Hunger Games, it can provide a material boost to results both in the near term and over the long haul, as ancillary sales and sequels are added to the picture. Making things more complicated, market demand for a given product is also a relative issue. If a more compelling movie opens at the same time as a Lions Gate film, performance could be hindered materially. The same is true for time slots in the cable and television realm.

Along these lines, it is important to note that a small number of titles often drive the financial performance of both the new products the company creates and in the catalog of older content it controls. While the company distributes or controls some prominent properties across many different genres (Thomas the Tank Engine, for example), the 13,000 figure noted above clearly contains some properties that have little value in the current market. Also, as some properties age, their value inherently diminishes (the appeal of Saw 3D could easily fade if a new “horror” franchise were to come along).

Talent is also an important aspect of Lions Gate’s business. This can include high profile, and at times difficult to work with, actors and quality writing staff, as well as those who perform more mundane “business” tasks. Relationships, however, can be very important in the media space, and the right connection at the right time can be very important. 

Lions Gate has made great strides over the past decade and now controls some very prominent media properties. This should translate to solid near-term performance. That said, the high debt load means that the company has little wiggle room for mistakes.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.