Item 1A. Risk Factors
Item 1A. Risk Factors.
Other than as set forth below, there were no other material changes to the risk factors previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
If Entertainment One Canada Ltd. loses Canadian status, it could lose licenses, incentives and tax credits.
Through the acquisition of eOne, the Company acquired the economic interests in Entertainment One Canada Ltd., a Canadian corporation (“EOCL”). EOCL is able to benefit from a number of licenses, incentive programs and Canadian government tax credits as a result of it being “Canadian controlled” as defined in the Investment Canada Act. The Company has taken measures to ensure that EOCL’s Canadian status is maintained. There can be no assurance, however, that EOCL will be able to continue to maintain its Canadian status. The loss of EOCL’s Canadian status could harm the Company’s business, including the possible loss of future incentive programs and clawback of funding previously provided to EOCL.
The Company may fail to realize the anticipated benefits of the acquisition of eOne.
The Company may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the eOne acquisition. The Company also may not achieve the anticipated benefits from the eOne acquisition due to a number of factors, including: (a) an inability to integrate or benefit from the acquisition in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; and (e) the loss of our or the acquired business’ key employees.
Risks Related to the Business Combination
The completion of the Business Combination is subject to conditions, including certain conditions that may not be satisfied on a timely basis, if at all.
On December 22, 2023, we entered into the Business Combination Agreement with Screaming Eagle Acquisition Corp., a Cayman Islands exempted company (“SEAC”), SEAC II Corp., a Cayman Islands exempted company and a wholly owned subsidiary of SEAC (“New SEAC”), SEAC MergerCo, a Cayman Islands exempted company and a wholly owned subsidiary of New SEAC (“MergerCo”), 1455941 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and a wholly owned subsidiary of SEAC (“New BC Sub”), LG Sirius Holdings ULC, a British Columbia unlimited liability company and a wholly owned subsidiary of us (“Studio HoldCo”), and LG Orion Holdings ULC, a British Columbia unlimited liability company and a wholly-owned subsidiary of Studio HoldCo (“StudioCo,” and such agreement, the “Business Combination Agreement”).
Pursuant to the Business Combination Agreement, among other things and subject to the terms and conditions contained therein, (i) SEAC will merge with and into MergerCo (the “SEAC Merger”) with MergerCo surviving the SEAC Merger as a direct, wholly owned subsidiary of New SEAC, (ii) MergerCo will distribute all of its assets lawfully available for distribution to New SEAC by way of a cash dividend (the “Cash Distribution”), (iii) MergerCo will transfer by way of continuation from the Cayman Islands to British Columbia in accordance with the Cayman Islands Companies Act (as revised) (the “Companies Act”) and convert to a British Columbia unlimited liability company in accordance with the applicable provisions of the Business Corporations Act (British Columbia) (the “BC Act”) (the “MergerCo Domestication and Conversion”), (iv) New SEAC will transfer by way of continuation from the Cayman Islands (together with the MergerCo Domestication and Conversion, the “Domestications”) to British Columbia in accordance with the Companies Act and continue as a British Columbia company in accordance with the applicable provisions of the BC Act, (v) MergerCo and New BC Sub will amalgamate (the “MergerCo Amalgamation”) to form one corporate entity (“MergerCo Amalco”), with the attributes and
96
effects set out in a Plan of Arrangement, substantially in the form attached to the Business Combination Agreement filed as Exhibit 2.1 on our Current Report on Form 8-K filed with the SEC on December 26, 2023 (“Plan of Arrangement”), (vi) New SEAC and MergerCo Amalco shall amalgamate (the “SEAC Amalgamation”) to form one corporate entity (“SEAC Amalco”) in accordance with the terms of the Plan of Arrangement, and (vii) StudioCo and SEAC Amalco shall amalgamate to form one corporate entity ( “Pubco”), with the attributes and effects set out in the Plan of Arrangement (the “StudioCo Amalgamation” and, together with the MergerCo Amalgamation and the SEAC Amalgamation, the “Amalgamations,” and the Amalgamations together with the SEAC Merger, the Cash Distribution, and the Domestications, together with the other transactions contemplated by the Business Combination Agreement, the Plan of Arrangement and all other agreements, certificates and instruments entered into in connection therewith, the “Business Combination”).
As a result of the Business Combination, our Studio Business, which consists of our Motion Picture and Television Production segments and our general corporate administrative function, will be held by Pubco, which will be a separate, publicly traded company listed on the Nasdaq Stock Market. It is expected that immediately following the consummation of the Business Combination, we will indirectly own a number of common shares of Pubco equal to approximately 87.2% of the common shares of Pubco then issued and outstanding, while the remaining common shares will be publicly held.
The completion of the Business Combination is subject to a number of conditions. The timing and completion of the Business Combination is not assured and is subject to risks, including the risk that approval of the Business Combination by SEAC Shareholders is not obtained or that there are not sufficient funds in the Trust Account (as defined in the Business Combination Agreement), in each case subject to certain terms specified in the Business Combination Agreement, or that other Closing conditions are not satisfied. If we do not complete the Business Combination, we could be subject to various risks, including:
• the parties may be liable for damages to one another under certain circumstances pursuant to the terms and conditions of the Business Combination Agreement;
• negative reactions from the financial markets, including declines in the price of our common shares due to the fact that current prices may reflect a market assumption that the Business Combination will be completed; and
• the attention of our management will have been diverted to the Business Combination rather than the pursuit of other opportunities.
We may be subject to business uncertainties while the Business Combination is pending.
Uncertainty about the effect of the Business Combination on employees and third parties may have an adverse effect on us. These uncertainties may impair the ability to retain and motivate key personnel and could cause third parties that deal with us to defer entering into contracts or making other decisions or seek to change existing business relationships.
We may be restricted during the pendency of the Business Combination pursuant to terms of the Business Combination Agreement.
Prior to the consummation of the Business Combination, we are subject to customary interim operating covenants relating to carrying on the Studio Business in the ordinary course of business and are also subject to customary restrictions on actions that may be taken during such period without SEAC’s consent. As a result, we may be unable, during the pendency of the Business Combination, to make certain acquisitions and capital expenditures, borrow money and otherwise pursue other actions, even if such actions would prove beneficial.
We or Pubco may be held liable to the other if the other fails to perform under its agreements, and the performance of such services may negatively affect Pubco’s business and operations.
In connection with the Business Combination, we and Pubco will enter into a tax matters agreement, a shared services/overhead sharing agreement and a separation agreement that will provide for the performance of certain services by each company for the benefit of the other for a period of time after the completion of the Business Combination. If we or Pubco do not satisfactorily perform our obligations under the agreement, one of us may be held liable for any resulting losses suffered by the other, subject to certain limits.
We may not be able to complete a separation of Pubco from the Starz Business of Lionsgate in a timely manner, or at all.
We currently contemplate a separation of the Studio Business, which will be held by Pubco following the consummation of the Business Combination, and the Starz Business, which consists of substantially all of the assets and liabilities constituting our Media Networks segment, into two independent companies. Our ability to effect and complete such a separation is subject to a number of conditions and risks, including general business, economic, market and financial conditions, regulatory or other legal requirements, tax and capital structuring considerations and various other factors, all of which are difficult to predict and may be beyond our control. Therefore, there can be no assurance regarding the anticipated timing or structure of any separation of Pubco from the Starz Business or that the separation can be completed at all.
97
We may fail to realize the anticipated benefits of the Business Combination.
We may not achieve the anticipated benefits from the Business Combination due to a number of factors, including: (a) unanticipated costs or liabilities associated with the Business Combination; (b) the incurrence of transaction-related costs; (c) the diversion of management’s attention from other business concerns; and (d) the increased complexity and potential expense arising from the Studio Business being operated by Pubco, a separate public company.
We expect to incur significant transaction expenses in connection with the Business Combination.
We expect to incur substantial expenses, and devote significant resources, in connection with the completion of the Business Combination. The management of the combined business may face significant challenges in implementing the separation of the Studio Business into a separate public company, many of which may be beyond the control of management and which may result in increased costs and diversion of management’s time and energy, as well as materially adversely impact the anticipated benefits of the Business Combination and the business, financial condition and results of operations of the Company and Pubco. Factors beyond the parties’ control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately. Some of these expenses have already been incurred or may be incurred regardless of whether the Business Combination is completed.