Analysts Pan Latest Lionsgate Production

Content company not helped by embracing Starz
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Lionsgate’s agreement to acquire Starz wasn’t a hit on Wall Street.

Analysts said that while there were financial advantages for Starz with Lionsgate’s Canadian tax status—John Malone, an investor in both Starz and Lionsgate enjoys avoiding taxes—there was little strategic advantage for the studio.

Starz stock shot up 11.56% to finish Thursday at $31.51 after the deal was announced, but Lionsgate shares fell 3.39% to $20.23.

“We are unconvinced that Lionsgate will be better owning a lower-tier SVOD network,” said Doug Creutz of Cowan & Co. in a research note. “We think this is a deal that happened because management needed a deal to happen given poor recent financial performance and a declining share price.”

Creutz acknowledged that in addition to the tax benefit there are probably cost synergies the combined company could take advantage of but noted that much of those benefits appear to be going to Starz shareholders.

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“We think the most optimistic read of the deal is that it brings Lionsgate one step closer to being the vehicle for a rollup of a much larger content company, such as Discovery or CBS, per some of John Malone’s comment last year,” Creutz said. “However, there is no guarantee such a deal will happen, or is there a guarantee that if it does happen, Lionsgate shareholders will enjoy significant benefits.”

Creutz didn’t think anchoring Lionsgate to Starz was a good move strategically.

“We view Starz as the 4th- or 5th- or 6th-best SVOD asset in the market, certainly after HBO, Showtime, and Netflix, and possibly Amazon Prime and Hulu as well. Even with some recent successes in original programming, we think Starz could face challenges in retaining subs once their Disney content deal expires at year-end,” he said. “Further, we think that the specter of pressure on the premium cable bundle from (a) skinny bundles and (b) standalone OTT products from HBO and Showtime poses an even greater long term threat to Starz' ability to retain subscribers,”

In a similar vein, Todd Juenger of Sanford C. Bernstein noted that “the main economic benefit of the deal is tax synergy.” Juenger puts the tax benefit at about $900 million.

“Two of the things we liked best about Lionsgate were its independence, and its de-risked production model. In our view, this deal damages both of those virtues,” Juenger said.

“Lionsgate will now be vertically integrated: contest and distribution. It can still supply content to other distribution platforms, but it no longer can be viewed as ‘independent.’ The Starz service competes directly for viewers and subscription dollars with Lionsgate’s other customers and Starz’ success will be (a lot) more important to Lionsgate than any of its other network customers.”

He also questioned how well Starz would fare as the cable bundle eroded and its rights to Disney movies expires.

Juenger was able to question Starz and Lionsgate executive on a conference call about the deal for analysts. He asked about the risks in having Lionsgate’s business more dependent on the success of Starz.

“I think we see this as diversification in every way. I think we see this as financial diversification in terms of diversifying revenue. I think we see this as operational diversification in terms of scale of our platform, scale of our production business, and again, the scale of how we see ourselves as a global content machine,” replied Jon Feltheimer, CEO of Lions Gate Entertainment.

“We think this actually significantly de-risks our company… as we go down the road, we’ll be rolling out what some of the significant synergies are and how we’ll be getting those. But I think when you look at the… immediate and significant synergies we expect in this, that will be de-risking this company as well. We have been working on this transaction a long time. We’re really excited about it for the exact reason you said. We think it de-risks our business and brings significant shareholder value,” he said.

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