Lions Gate Owes More Than $1 Billion -- Should You Sell?

A Fool takes a look under the hood of a Hollywood upstart.

Jul 8, 2014 at 6:00PM
Hunger Games Catching Fire Poster

Lions Gate needs more hits like The Hunger Games: Catching Fire if it's to pay down more than $1 billion in debt. Image source: Lions Gate.

For most of us, debt is a wealth-destroying parasite that siphons cash we might otherwise save for retirement, vacations, or the occasional splurge. So isn't it worrisome that Lions Gate (NYSE:LGF), worth just $5.2 billion in enterprise value as of this writing, carries more than $1 billion in debt on its balance sheet? Not really, but you'll need to take a closer look at the financials to understand why.

Measuring the impact of debt
Companies borrow for any number of reasons. For Lions Gate, debt helps to fund growth initiatives. That includes acquisitions, such as the 2012 buyout of Summit Entertainment that brought the studio rights to the Twilight franchise. A smart move, since Stephenie Meyer's sparkly vampires and shirtless werewolves earned $3.35 billion at the box office over four years, according to The-Numbers.com.

Lions Gate accelerated payments on the Summit loan in fiscal 2013 and has since finished repaying all $500 million it borrowed. Yet significant debts remain, as this table shows:

Principal Debts (interest rate)
Fiscal 2014
Fiscal 2013

Corporate debt (between 2.65% and 5.25%)

$689.8 million

$884.3 million

Production debt (between 2.74% and 3.49%)

$418.9 million

$469.3 million

TOTAL CORPORATE AND PRODUCTION DEBT

$1,108.7 million

$1,353.6 million

Source: Lions Gate 10-K annual filing.

Corporate debt is for strategic moves such as the Summit deal. Production debt is specific to making movies, such as The Hunger Games and Divergent series. Net gains from box office, DVD, Blu-ray, and digital download sales, and from licensing and syndication, help to repay these obligations.

More borrowing to come, and why that's a good thing
Yet we shouldn't expect Lions Gate to pay off all its debts soon. If anything, we'll see the studio borrowing more to fund forthcoming projects, including three more movies in the Divergent series as well as The Hunger Games: Mockingjay part 2. Any one of those films -- or all of them -- could cost at least $100 million to produce.

How big a risk is Lions Gate taking with these would-be blockbusters? Not as much as you might think. The studio has generated over $250 million in cash from operations in each of the last two fiscal years, more than enough to cover Lions Gate's meager capital expenditures (generally less than $10 million annually). Returns on capital have come in near or above 10% over the same period, well above the average cost of debt, S&P Capital IQ reports. Lions Gate is using leverage to create value for shareholders.

Foolish takeaway
History says we can expect the company to keep on doing so. Consider how CEO Jon Feltheimer and his team funded Divergent. Pre-selling foreign rights cut Lions Gate's out-of-pocket production spending to an estimated $15 million before marketing and distribution costs. A shrewd decision that I think will pay off many times over, especially with Divergent earning $150.6 million in domestic grosses and another $118.3 million overseas, according to Box Office Mojo.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Lions Gate Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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