Two Hollywood studios combine

Lions Gate Entertainment acquires Twilight producer Summit Entertainment for $412.5 million.

Lions Gate Entertainment Corp 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 in a statement. Both film labels, run from Santa Monica, California, would remain active producers and the company expects to save money by combining some tasks.

The accord gives Lions Gate, maker of TV show Mad Men 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 January 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 would realise savings from consolidation of support operations, said chairman and chief executive, Jon Feltheimer. Details were still being worked out, he said.

Summit’s senior executives, co-chairman and chief executive, Rob Friedman, and co-chairman and president, Patrick Wachsberger, said in an interview they would continue to run Summit.

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, adding it planned to repay the loan from cash flow before the 2016 maturity.

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 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.