”This isn’t a divorce, more of a separation,“ one analyst says of the possibility that the studio assets could be spun off rather than Starz
Lionsgate has been an attractive acquisition target for years, with rumors constantly swirling and at least a few deals that never got over the finish line. But the mini-major’s latest moves have some analysts thinking that CEO Jon Feltheimer may be positioning the company for something other than being sold wholesale to the highest bidder.
Eyebrows were raised about Lionsgate late last month when the company filed an 8-K form signaling its intention to spin off the studio and production side as its own entity, as opposed to the Starz cable network and streaming service that had long been tipped as the business unit most likely to be spun off.
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That’s a lot of spinning, but analysts who spoke to TheWrap feel that Lionsgate is scrambling to avoid a “fire sale” in a down financial market. The new approach allows Wall Street to value both the studio and Starz on separate terms, and better positions the company to sell a minority stake in the studio and still retain some much-needed control.
“This isn’t a divorce, more of a separation. This is making sure that the market is able to separately value the content from the means of that content production, and separately from the distribution of that and other content. Content continues to be king,” Ian Greenblatt, managing director of Technology/Media/Telecom Intelligence at JD Power, told TheWrap. “Being one of the few independent studios left, and with consolidation continuing, the value of a library like Lionsgate, 17,000-plus titles, it’s very attractive.”
Lionsgate acquired Starz five years ago for $4.4 billion, and while the service has managed to steadily grow subscribers, now reaching 26.3 million streaming users and 37.3 million global subscribers (which includes streaming, linear TV and Starzplay Arabia), the service is nowhere near the scale or reach of its biggest rivals. Worse, the acquisition has left the company with roughly $2 billion in debt.
“We believe Starz is a ripe acquisition candidate,” said Mark Boidman, head of media & entertainment at the NYC-based investment bank Solomon Partners. “Regardless of the form of what’s being spun out, we think that separating these businesses is the right path, so from a valuation perspective, it will be easier to value them and would maximize their valuation.”
Even as Lionsgate indicates plans to spin off the studio, an industry source familiar with the situation said the company is still having productive discussions on both sides of the business with multiple strategic partners.
Reps for Lionsgate had no comment for this piece.
Greenblatt points to a recent template for Lionsgate’s approach: AT&T’s 2021 sale of a minority stake in DirecTV, which allowed the telecom giant to spin off the satellite TV unit and create value the company didn’t have previously. For Lionsgate, a similar move would not only generate interest in the public market and retire debt but also provide a valuation for its content and studio production operations. What’s more, if the company can maintain control of the studio and library by only selling a minority stake, that ensures a pipeline of content for Starz without having to sell against themselves.
“If you can separately value it while continuing to maintain control of it, that’s the Grail,” Greenblatt said.
It doesn’t hurt that Lionsgate is coming off an impressive year in its TV unit, notching 14 new shows that have been renewed such as CBS’ “Ghosts” and Fox’s “Welcome to Flatch.” And the studio is certainly not starving for IP, with new projects due in the next year based on established franchises, including “John Wick: Chapter 4” and its own Starz prequel series “The Continental,” “The Hunger Games” prequel “A Ballad of Songbirds and Snakes,” the fourth “Expendables” film, a “Borderlands” film based on the video game franchise, a “Dirty Dancing” sequel and the “Power” universe of shows on Starz.
“This should be a platform just like Netflix and HBO and Paramount+. Lionsgate has the library to do it. They just need to create more original content,” an individual familiar with Lionsgate’s operations said. “If they continue to stay on track and grow that subscriber base, it’s not insignificant, and especially if they can expand internationally, they can really ramp up their subscriber count.”
Despite the steady growth for Starz, it trails well behind other streamers from better-financed conglomerates — and efforts to spin it off have foundered. As a result, Lionsgate execs may just be “accepting reality” that Starz may not have many buyers “at what leadership sees as acceptable value,” according to analyst Steve Birenberg, principal with Northlake Capital Management.
Because Lionsgate’s studio assets still have incredible value, Birenberg suggested the calculus for top brass may have changed in the wake of MGM’s recent sale to Amazon for $8.5 billion. After all, the company arguably has the largest library of filmed content still on the market.
But many on Wall Street remain skeptical that Lionsgate leadership will actually pull the trigger on a meaningful sale, noting the numerous shifting target dates and minor growth in earnings.
“They haven’t been willing sellers. Management has an exaggerated opinion of the value that they can create in the company by themselves. So they’ve neglected doing that,” Birenberg said. “Their growth plan requires upfront investments, more productions of films and TV and investment in more new programming at Starz. They’re sacrificing near-term profits to build what they think is a bigger company long term. But they’ve never consistently hit their financial goals. So there’s little trust on the part of Wall Street that they’ll ever do that or realize value in a well-structured M&A transaction.”
Greenblatt and Birenberg also expressed uncertainty about what buyers might emerge for Lionsgate, especially for just a minority stake. Prospective buyers could include the private equity firm Apollo or an international player like Canal+, analysts said. Meanwhile, bigger companies like Apple, Amazon and Netflix may be less interested in acquiring production capabilities or a streaming service they already have.
Despite Lionsgate’s desire to retain some control, many feel the company would be best served by selling outright. “What Lionsgate really needs to do is sell 100%,” Birenberg said. “What it really needs to do is just give up trying to become a major player and accept the highest bid for either the whole company or for just the studio and then move forward from there.”
There’s little sign that Lionsgate execs are interested in that course just yet — especially since the company just hired STX’s Adam Fogelson and extended the contracts of CEO Jon Feltheimer, TV group chair Kevin Beggs and motion picture group chair Joe Drake.
That team will be charged to operate “business as usual,” Greenblatt said, in hopes of a sale of some kind down the line. “It’s still an attractive property. They don’t have to do something stupid,” Greenblatt said. “Better to crush it than rush it, and they don’t need to rush it.”
Still, many feel an acquisition is the best shot for Lionsgate long-term. “The strategy for them will be to get acquired,” the individual familiar with Lionsgate said. “The way to successfully do that is develop phenomenal original content, grow your subscriber base and make sure you’ve got a nice international component. You do all those three things, there will be a lot of demand for this business.”