Lions Gate to Buy Artisan Entertainment

Independent film distributor Artisan Entertainment Inc., best known for the 1999 phenomenon “The Blair Witch Project,” is being sold for $160 million in cash to fellow independent Lions Gate Entertainment Corp., the companies said Monday.

The sale will mark a further winnowing in the ranks of independent distributors, which often lack the resources and bulk to go it alone. Most significant independent movies are released through specialty divisions of giant media conglomerates, such as Walt Disney Co.’s Miramax and News Corp.’s Fox Searchlight unit.

The deal culminates an on-again, off-again courtship that lasted two years.

Santa Monica-based Artisan’s investors -- led by controlling shareholder Audax Group of Boston -- have been trying hard to sell the company, launching an auction five months ago. Other major investors include Beverly Hills-based Canyon Partners, Richland, Gordon & Co. of Chicago, Canada’s CTV and New York media investment bank Allen & Co.

“The board felt it was time to focus on maximizing shareholder value,” Artisan Chief Executive Amir Malin said.

Based in Marina del Rey and Vancouver, Canada, Lions Gate was one of three finalists, along with Boston investment company Echo Bridge and a group led by veteran producer Stanley Jaffe and independent film executive Scott Greenstein.

Lions Gate will assume Artisan’s debt, which stands at $57 million, but that is projected to narrow to as little as $45 million by early December, when the deal is expected to close.

The cash price could be boosted further if the coming Artisan films “Dirty Dancing: Havana Nights” and “The Punisher” perform well. Lions Gate is expected to have more than $300 million in total debt after the deal closes.

Lions Gate has been bulking up by buying small independent companies such as Trimark Holdings. Lions Gate is best known for such independent films as “Monster’s Ball,” which earned Halle Berry an Oscar for best actress, and “Gods and Monsters.” The combined company will have more than 8,000 films, TV shows, children’s programs and exercise videos in its library, including such varied titles as “Terminator 2: Judgment Day,” “Total Recall,” “It’s a Wonderful Life” and “On Golden Pond.”

Lions Gate Chief Executive Jon Feltheimer said the deal made sense in part because new technologies such as high-definition DVD and video on demand bode well for companies with large libraries, sparking new demand for old films.

“This is the only business where technology, instead of creating obsolescence, creates new ways to make money,” Feltheimer said.

Artisan was widely lauded for its guerrilla marketing campaign for “Blair Witch,” one of the first to rely extensively on the Internet to build buzz. Made to look like a documentary, the horror film told the tale of three student filmmakers who disappeared shooting a movie in the Maryland woods, with the film making use of footage said to have been mysteriously found a year later. It grossed more than $140 million at the box office.

But Artisan never came close to replicating that huge success. The 2000 sequel, “Book of Shadows: Blair Witch 2,” was a box-office disappointment.

“They never even got a second sip out of the same bottle,” said Dennis McAlpine of New York research firm McAlpine Associates.

Along the way, the company also spent its way into a big debt hole that topped out at more than $270 million in 2000. After taking control that year, Malin turned off the company’s production spigot and set about trying to make a dent in its debt.

“There is no question that when this management took over in late 2000, there were severe problems,” Malin said. “The goal from day one has been to show material, tangible improvement.”

Malin proceeded to slash debt to its current level and build revenue through the company’s healthy video division, which benefited from the explosion in the DVD business. The company has about $350 million in revenue and an operating profit of about $50 million, Malin said.