Vancouver: Lions Gate Entertainment has signed a deal with Hollywood movie mogul Peter Guber and distributor Paramount Pictures.

The landmark deal was forged by new player Frank Giustra, ceo of Lions Gate. In the agreement, he and Guber (with partners Adam Platnick and Paul Schaeffer) create Mandalay Pictures.

Guber and company are in the process of moving from the Sony lot to Paramount with a contract to produce up to 20 films over the next five years.

Through an upfront equity cash injection of us$50 million and a further us$25 million by year end, Lions Gate will own 45% of Mandalay Pictures, while Guber and partners will earn the balance on sweat equity.

However, in order to keep costs down and performance incentives high, Giustra will control Guber’s access to profits generated by the films, which will range from us$15 million to us$75 million in budgets and average us$40 million.

Over the next five years, the 20-picture deal represents us$800 million in investment promises, not including p&a costs. Lions Gate will approve budgets, while Guber will have creative control.

The all-important output deal with Paramount means that the u.s. studio distributor controls distribution for most of the world, except for the u.k., France, Japan, Australia, Spain, Greece and Germany. Mandalay Pictures – which will take the feature work from Mandalay Entertainment – is currently negotiating three-year deals with distributors in each of those markets.

Foreign distributors include Italy’s Cecchi Gori and Australia’s Village Road Show.

Paramount and the distributors will provide advances of up to 90% of the budget of each film, provide the cash flow for the marketing, and cover Mandalay Pictures’ overhead.

At the end of the day, when the fixed distribution period elapses, Mandalay Pictures will own 100% of the pictures.

As Lions Gate’s investor relations rep Karen Fisman says: ‘We’ve really limited our market risk.’

Although the Mandalay deal prompted at least one market analyst to upgrade his recommendation from speculative buy to strong buy, based on trading immediately following the announcement March 9, the market has seemed hesitant to embrace the new deal.

After the trading halt Monday, March 9 to make the Mandalay announcement, trading resumed the next day on the tse with increased volumes but prices edged up only a nickel over the original ipo price of $4.05. The following Tuesday, shares were trading at $4.40, compared to a year high of $5 and a year low of $3.

Still, Yorkton Securities analyst Roger Dent is projecting $6 per share and is optimistic in his most recent report. ‘Given the economic model created through this deal,’ he says, ‘Mandalay should be able to earn good returns even if its films only deliver average results for their budget level.’

And as Fisman explains it, the market is slow to react because it is struggling to understand a complex deal. ‘I’d rather not have a huge pop [in share price] at the outset,’ she says. ‘This is such an unusual deal for Canadian investors.’

About 65% of Lions Gate’s shares are free-trading.

Guber, who will take executive producer credits in the films, will work for fees and have no gross participation. Lions Gate has the right to convert his share of net profits into Lions Gate shares to create an incentive to build the Vancouver company and maximize profit at the net level, says Fisman.

She says it will be 60 to 90 days before the first feature is announced.

Mandalay Pictures will likely produce one film this calendar year and four or more each year for the balance of the five-year deal.

Cancon will not be a concern, and there is no guarantee that any of the features will come to Canada. However, says Fisman, the producers are expected to consider the low Canadian dollar and new production services tax credits in their budgeting.

Guber has exec produced features such as Batman, Rainman, Seven Years in Tibet and I Know What You Did Last Summer, which grossed us$70 million on a us$15 million budget.

According to Lions Gate, Guber has averaged a North American box office of us$53 million per film (adjusted for inflation) since 1977.