Image fields calls as company considers Lions Gate merger.

While Chatsworth-based multimedia entertainment firm, Image Entertainment Inc. might not get the same amount of press as the other entertainment powerhouses in the Valley, its hasn't escaped the attention of Santa Monica-based Lions Gate Entertainment, which recently made an unsolicited proposal to purchase Image.

Already the owner of 18.98 percent of Image's currently outstanding shares of common stock, Lions Gate is aggressively pursuing Image, a company that has made its name in Hollywood as a major distributor of independent straight to DVD films, as well as music DVDs.

"Lions Gate is looking at Image because Lions Gate recognizes the fact that content is king. We have over 3,000 titles in our film library. That would represent nearly half their existing library," Image's President and CEO, Martin W. Greenwald said. "Having thousands of titles for multiple forms of distribution is very valuable. Additionally, there is a great potential between the two companies to save money in terms of the administration of the two businesses. We also dominate certain spaces Lions Gate would love to be in."

While Image made its name as a licensee and distributor of films produced by other parties, it has recently made its first forays into the production of feature films, inking agreements with various production companies that will enable Image to own rather than license works in the future. Additionally, Image has branched out to become a record label of sorts, producing and distributing content from music artists that have been overlooked by the major labels.

Lion's Gate, a distributor of independent films such as "Monster's Ball," "Crash," and "Fahrenheit 9/11," originally expressed its interest in acquiring Image in a letter sent to Image's board on Aug. 30. Image's board wrote back on Sept. 2, saying it was willing to discuss the merger. While no meeting has yet occurred between the two companies, Greenwald expects one to occur in the near future.

"Meetings have been going on at our company internally and in the very near future we will be sitting down with Lions Gate to discuss issues of valuation," Greenwald said. "We're taking the process seriously. As a result of the offer, we've also been getting calls from large and small companies that are expressing interest in buying us, or even asking if we're interested in buying them."

However, a sale of Image is not a sure thing. Greenwald has gone on record as saying that Lions Gate's current offer is still low. In its regulatory filing filed on September 13, Lions Gate offered to pay $0.38 to $0.42 in Lions Gate shares for each share of Image. Based on Lions Gate's closing price on that date ($10.40 a share), the offer values each of Image's shares at between $3.95 and $4.37 each, or between $84.1 million and $93 million overall. As of the close of trading on Sept. 20, Image's stock was going for $4.34 per share.

In an effort to properly value the price of the company, Image has engaged the Salter Group to provide independent financial advisory services in connection with evaluating Lions Gate's proposal.

While most analysts see Image as a solid buy for Lion's Gate, not all of them are certain that the deal will go through. Steve Denault, a senior research analyst for Northland Securities believes that Lions Gate's current offer remains low.

"It would certainly be a valuable purchase for Lions Gate. It definitely would add to their existing library of films," Denault said. "However, I tend to agree with Martin Greenwald's statement that the bid was a bit low.

I think it's possible that the deal might not happen. Image has some reasonable provisions in place to make sure that it happens at a fair price."

David Miller, an analyst with Sanders, Morris & Harris wrote in a report that Image represents a valuable acquisition for a company such as Lions Gate.

"Home video distribution is a commoditized, price elastic business. Adding size, scale and scope to any distribution-oriented business lowers a distributor's average cost/unit, which enhances margins. Folding Image into the Lions Gate business model would give Lions Gate additional bargaining and supplier power with retailers, which has become critical as the battle for shelf space continues to intensify," Miller wrote.

If the deal does end up going through, there will likely be ramifications locally. As with many mergers in the business world, there will inevitably be redundancies between Image and Lions Gate. If the companies merge, some of Image's 200 employees (150 in Chatsworth) will inevitably be laid off, Greenwald said.

JEFF WEISS 

Staff Reporter