Screaming Eagle (NASDAQ:SCRM) has entered in to a definitive agreement to combine with Lionsgate Studios at an enterprise value of $4.6 billion.

Lionsgate Studios will be made up of the TV studio and film production portions of its parent Lionsgate Entertainment (NYSE:LGF.A, LGF.B) as well as its existing content libraries.

The combined company will trade separately from its parent’s stock once the deal is completed in the spring of 2024.

Transaction Overview

Screaming Eagle has about $750 million in its current trust, but it expects this to be reduced to about $175 million after redemptions. It plans to match this with a $175 million PIPE discounted -10% to $9.63 per share.

Lionsgate Studios expects to use $317 million of proceeds to de-lever while eating $33 million in expenses associated with the transaction and a warrant buyback.

Screaming Eagle will ask its shareholders to approve the warrant proposal by which the combined company would buy back each warrant at $0.50 per warrant. About 44.2% of warrant holders have already consented to this proposal.

Existing Lionsgate shareholders are expected to own 87.3% of the spun-off entity at close with PIPE investors taking a 6.3% stake and public Screaming Eagle shareholders 5.7%. The SPAC’s sponsor is to see its upfront promote shares convert to a 0.7% stake.

That is to come after the sponsor and directors forfeit 14,500,000 promote shares (77.3%) while another 2,200,000 (11.3%) will be held in escrow. These will only vest if the combined company’s stock increases in value by 50% from a price of $10.70, effectively setting a $16.05 target price.

Screaming Eagle has an estimated $10.58 cash per share in trust currently, but has traded at a premium to NAV for much of the past month, hitting a high of $10.65 earlier today.

The SPAC must eliminate its warrant overhang as a condition to close, but other terms and conditions have not yet been made public as Screaming Eagle has yet to file its merger documents. Its profile page will be updated once more information is made available.

Quick Takes: The Eagle team’s latest deal immediately screams into third place among the largest deals of 2023 by enterprise value and is the only one standing on the dais that is not an Electric Vehicle deal.

In fact, only one SPAC has brought in a target valued over $2 billion since the beginning of 2022 that wasn’t a EV maker or automotive technology firm. That exception was Avalon’s combination with fintech Beneficient (NASDAQ:BENF), which was still working to fully commercially launch its platform.

As such, Lionsgate Studios is unique among recent SPAC deals in that it is a big deal with an established operating company that has already essentially proven its business and business model.

It generated a little over $3 billion in revenue in its 2023 fiscal year, meaning this deal is priced at a conservative 1.5x revenue.

The company did not share its historic EBITDA performance, but its parent company reported an overall net loss of -$959 million in the six months ending September 30, 2023. This was a billion-dollar improvement over the -$1.9 billion it lost during the same period in 2022.

The wider Lionsgate group includes other subsidiaries however, including the STARZ premium TV channel which will remain with the parent and will not be spun off. One new department that is coming with the deal is eOne, which Lionsgate agreed to acquire from Hasbro (NASDAQ:HAS) in August for $500 million.

eOne has developed a library of scripted and unscripted content numbering 6,500 titles including the recent hit TV show “Yellowjackets” and the film “1917”. Hasbro had hoped to use eOne’s expertise to develop further film spinoffs of its toy-related intellectual property after the success of “Barbie”.

Now, some of those in-production projects will be Lionsgate’s to bring to the screen, including an adaptation of the board game Monopoly.

It is perhaps incorporating those ventures that makes Lionsgate optimistic about its future profits. While it did not divulge backward-looking EBITDA, the presentation notes that the deal values it at 10.5x its 2025E EBITDA, effectively predicting $445 million in EBITDA that year.

The post-transaction company would still be carrying a significant debt load as it gets there, however. Even if it is able to use all of its expected cash proceeds for deleveraging purposes, that would still leave it with over $1.4 billion in net debt.

It also expects revenues to contract slightly to $2.9 billion in the near term for its 2024 fiscal year, but also to generate $320 million in OIBDA during that period for an 11.3% margin by that measure. It expects eOne to contribute a further $60 million in OIBDA during the period.

All the same, if Lionsgate Studios hits its 2025 mark, it will have been one of the cheapest studio deals in recent years for investors.

Amazon’s (NASDAQ:AMZN) 2021 deal to acquire MGM for $8.45 billion valued the company at 27.5x EBITDA and Blackstone (NYSE:BX) paid 30x to buyout Moonbug Entertainment later that year for $3 billion.

Next to those blockbuster deals, Lionsgate looks like the much hotter ticket for investors at 10.5x.

ADVISORS

Lionsgate Studios Advisors:

• Morgan Stanley & Co. LLC (“Morgan Stanley”) is acting as financial advisor
• Wachtell, Lipton, Rosen & Katz is acting as legal advisor to Lionsgate and Denton’s Canada LLP is acting as legal advisor to Lionsgate in Canada

SPAC Advisors:

• Citigroup Global Markets Inc. (“Citigroup”) is acting as financial advisor
• White & Case LLP is acting as legal advisor to Screaming Eagle and Goodmans LLP is acting as legal advisor to Screaming Eagle in Canada
• Citigroup and Morgan Stanley are acting as co-placement agents for Screaming Eagle with respect to the common equity financing
• Davis Polk & Wardwell LLP is acting as legal advisor to Citigroup and Morgan Stanley in connection with their roles as co-placement agents