Lionsgate shares rallied slightly Wednesday as the market appeared to respond positively to the prior day’s Wall Street Journal report that the film and television studio was mulling a sale, spinoff or sponsored spin of its premium cabler, Starz. But sources indicate that the company is not expected to take any imminent action, and does not feel a particular sense of urgency to make an immediate decision.
SunTrust Robinson Humphrey analyst Matthew Thornton sees the creation of a sponsored spin as “the most likely scenario at current.” In this scenario, a SPAC, or special-purpose acquisition company, would be created to raise capital through a public offering and stake in Starz, with funds going toward expansion abroad and deleveraging. Part of Lionsgate’s $2.9 billion debt load would also be offloaded to the new entity.
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In fleshing out other possible ways for Lionsgate to unlock value, the equity analysis firm also outlined several additional options, including: the introduction of a financial or strategic partner for Starz International; a pivot away from the international Starz platform altogether in favor of licensing content abroad while deleveraging, buying back shares and focusing on the domestic Starz platform; an outright sale of Starz; a move to raise equity capital at Lionsgate; and a “go-it-alone” on expansion of Starz International. Thornton views the first four as positive possibilities.
Lionsgate is considering a wide range of options, say sources. The goal of any potential action is to unlock value, as Lionsgate shares have been pressured in recent years. The stock, which as recently as January of 2018 was trading above $35 a share, has since slid to less than $10. Wednesday’s uptick of 4.4% only brings shares to $9.34. Shares also took a hit last month amid reports that Comcast was considering dropping Starz from its bundle; those talks are still ongoing until their current pact expires at the end of the year.
It’s no secret that the top brass at Lionsgate believe Wall Street isn’t valuing the studio and its parts properly.
“We don’t like where our stock price is,” said Lionsgate vice chairman Michael Burns at the Goldman Sachs Communacopia investor conference several weeks ago. “We think we’re incredibly undervalued.”
Essentially, shedding Starz — which Lionsgate acquired in 2016 for $4.4 billion — and some of its debt would force investors to reevaluate Lionsgate’s other assets.
According to Thornton, if Starz is currently valued at somewhere between $4 billion to $5 billion, then the Lionsgate film and TV studios are being valued at negative $350 million to a positive $650 million.
That is “well below value, based on other recent comparables and on library value,” he wrote in a Wednesday note to clients.
M&A chatter has swirled around Starz for some time now, with CBS previously said to be interested in acquiring the cabler. But that talk has cooled in recent months, as a newly merged ViacomCBS keeps its hands full with the integration of both companies and indicates that it is not currently entertaining acquisitive thoughts.
A split Starz and Lionsgate might make either entity more appealing as an M&A target, though Thornton does not believe that is a top reason to spin off the cable network.
Lionsgate boosters think what the studio really suffers from is an optics problem. What its executive team will ultimately decide to pursue is still a question mark.
“All those conversations are ongoing,” said Burns at the same conference in September. “We don’t need to do anything, because we have $1.5 billion of undrawn credit facility. But we’re looking at it and saying, all right, we need to be very diligent in our thinking and the timing. If we take money at terms that we want, that are ultimately accretive to our shareholders or beneficial for them, so we’re looking at everything.”
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