Image committee to evaluate Lions Gate bid

DVD distributor Image Entertainment Inc., the target of an all-stock takeover offer by Lions Gate Entertainment Inc., has set up a board committee to evaluate the proposal.

In a regulatory filing late Tuesday, Lions Gate revealed it aims to bid for Image, which has a library of about 3,000 DVDs, several hundred music CD titles, and annual revenue of almost $120-million (U.S.).

In a statement yesterday, Chatsworth, Calif.-based Image said the proposal was unsolicited and the company "is not for sale," but it has established a special committee of directors to look at the offer, which will be given "all the consideration that it deserves."

Chief executive officer Martin Greenwald said the offer acknowledges "the breadth and depth of our library of filmed entertainment, as well as the growing audio component of our business." However, "the value of the company today and in the future is far greater than what is being offered."

Based on Tuesday's closing stock prices, the Lions Gate offer values Image at about $93-million. Since Lions Gate already owns about 19 per cent of Image stock, it would have to turn over about $75-million more in stock to buy out the rest of the shares. Lions Gate, which produces and distributes movies and television shows, is based in Vancouver, although its main office is in Santa Monica, Calif.

The offer proposes an exchange of between 0.38 and 0.42 of a Lions Gate share for each Image share. The midpoint of that range translates into a premium of about 36 per cent from Image's Aug. 29 stock price of $2.82.

Image shares, which trade on the Nasdaq Stock Market, jumped yesterday on news of the offer. The stock closed Tuesday at $3, but shot up on the opening by more than a dollar, and closed the day at $4.42.

Lions Gate has already managed to acquire about 19 per cent of Image stock through purchases on the open market, and by buying stock from some large shareholders, including U.S. dot-com billionaire Mark Cuban. Some share purchase agreements provide that Lions Gate top up the price paid for the shares, if it acquires Image at a higher share value some time in the next year.

Analyst Steve Denault of Northland Securities in Minneapolis said in a note to clients yesterday that despite Image's "not for sale" stance, the deal could be consummated eventually. "We believe negotiations may have just begun, and that a transaction is very possible and likely probably at a higher price."

Lions Gate stock fell 25 cents to close at $10.15 yesterday on the New York Stock Exchange.