Why did Lionsgate make an equity contribution in the form of cash and stock to the Merger Sub rather than making the cash portion of the contributed capital in the form of a loan?

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Hollywood's Biggest Independent Studios Combine in a Leveraged Buyout Key Points LBOs allow buyouts using relatively little cash and often rely heavily on the target firm's assets to finance the transaction. Private equity investors onen"cash out" of their investments by selling to a strategic buyer. The Lionsgate-Summit tie-up represented the culmination of more than four years of intermittent discussions between the two firms. The number ofstudios making and releasing m been shrinking amid falling DVD sales and continued efforts to transition to digital distribution. As the largest independent studios in Hollywood, both firms saw their cash flow whipsawed as one blockbuster hit would be followed by a series of failures, and TV Film program libraries offered the source of cash flow stability due to the recurring fees paid by those licensing the rights to use this proprietary content. Lionsgate first approached Summit about a buyout in 2008 in an effort to bolster its film and TV library. However, it was not until early 2012 that the two sides could reach agreement. The time w ripe because Summit's investors were looking for a way to cash in on the success of the firm's movies series. Consisting of four films, this series had grossed S2.5 billion worldwide. On February 2, 2012, Lionsgate announced that it had reached an agreement to acquire Summit Entertainment by paying Summit shareholders S412.5 million in cash and stock for allof their outstanding shares and assumed debt of $506.3 million. According to the merger agreement, Lion would provide administrative, production, and distribution services to Summit for a 10% servicing fee. Layoffs are expected at both firms as they merge redundant departments in their film operations, such as marketing, production, and distribution. The acquisition provides a windfall to Summi it's investors. including eBay cofounder Jeff Skoll's film company Media and private equity fund Traverse Management. These investors had previously received a S200 million dividend as part ofa recapitalization in early 2011 and gained handsomely from the sale to Lionsgate. is a diversified film and television production and distribution company, with a film library of 13,000 titles. The firm's major distribution channels include home entertainment and prepackaged m (DVDs digital distribution (on-demand TV) and pay TV (premium network programming). Summit, also a producer and distributor of film and TV content, has a less consistent track record in realizing successful releases. with the Twilight"franchise" its primary success. However, Summit does have strong international licensing operations, with amangements in the United States, Canada, Germany, France, Scandinavia, Spain, and Australia. The acquisition also strengthens Lionsgate's position as a leading content supplier and,controlling the Twilight and Hunger Games franchises, positions Lionsgate as a market leader for young adult audiences. The combination also results in cost and revenue synergies, more divers cash flow streams, and greater access to intemational distribution channels. Eikurs llustrates the subsidiary structure for completing the buyout ofSummit Entertainment LLC. As is typical of such transactions, Lionsgate created a merger subsidiary (Merger Sub)and funded the subsidiary with its equity contribution of SI00 million in cash and S69 million in Lionsgate stock, receiving 10% of the subsidiary's stock in exchange. Merger Sub was further capitalized by bank term loan ofS500 mi ion. Following a tender offer to Summit's shareholders by Merger Sub. Merger Sub was merged into Summit Entertainment, with Summit surviving as a wholly owned subsidiary ofLionsgate in a reverse triangular merger. closing S284Amillion ofSummit's excess cash was used to finance the total cost of the deal. S284A Million in Lionsgate Entertainment S100 Million in Cash & S69 Merger Merger Sub Merges Million in With Summit