It’s a snapshot of a studio that’s seen better days: Lionsgate lost $50 million in its fiscal fourth quarter that ended March 31, 2022, sending the already-struggling stock below $10 per share. At its peak in early 2018, the Lionsgate market cap (the total value of a company’s outstanding shares) briefly topped $7 billion and its enterprise value (market cap + available cash + debt; what it would cost to acquire the company) climbed north of $10 billion. Today, the market cap is $2.2 billion and the EV is $5.8 billion.
A company that needs to realize value now needs to sell or spin off one of its stars — in the case of Lionsgate, premium cable and satellite TV network Starz. It’s no secret: Lionsgate executives announced that the company was on the block last November. On last Thursday’s Q4 earnings conference call, CEO Jon Feltheimer said Lionsgate expects to announce a sale or spinoff of Starz by the end of summer, and the transaction could close as early as next year’s January-March quarter.
Since Lionsgate bought Starz in 2016 for $4.4 billion, there were some wins: The Starz programming slate gained focus and grew from six to 11 original series. It also did a good job of riding the wave from linear TV to streaming while reducing churn and growing its subscriber base. Still, there’s no question that it will sell the network at a loss. The 2016 purchase price is more than twice what all outstanding shares in Lionsgate are worth today.
However, Lionsgate’s transparency around the sale is not a testament to desperation. It’s because it has every reason to believe that Starz contains greater value that could be unlocked by a different partner — and with Lionsgate remaining as a majority shareholder (the current intent), that’s when its own Starz winning can begin.
Following last week’s quarterly earnings, equity analysts at Benchmark lowered their enterprise valuation for Starz from $2.9 billion to $2.5 billion. That’s optimistic compared to Wells Fargo’s recent valuation of just $1.7 billion for Starz. Both analyst groups believe Lionsgate’s per-share price is currently undervalued by roughly half — or more.
The neon “For Sale” sign seems to be working. In May, The Wall Street Journal reported that Roku and private equity firm Apollo Global Management made a bid for 20 percent of Starz. News of a DirecTV bid for Starz followed. Either would make sense: Starz is available as a DirecTV add-on, and Lionsgate recently broadened its output deal with Roku to include an exclusive, post-Starz window for movies like the new “John Wick,” “Expendables 4,” “Borderlands,” “Are You There God? It’s Me, Margaret,” and Nicolas Cage vehicle “The Unbearable Weight of Massive Talent.”
Driving any Starz purchase is its library of original series, led by “Outlander” and the “Power” franchise and the demographics they attract. The Starz superpower lies in its focus on female audiences and underrepresented groups, like African Americans and the Latinx population. Women drive the passionate following for “Outlander;” African Americans do likewise for the many “Power” shows.
“If you were Paramount+ or Peacock or something like that, you could argue that Starz would bring not just whatever amount of millions of subscribers, but maybe a different subscriber, and that could be a positive for them,” said one television executive, who spoke with IndieWire on the condition of anonymity.
Complicating matters is the future of “Power” Universe executive producer Curtis “50 Cent” Jackson. His overall deal at Starz expires this fall, and the rapper/actor/businessman makes clear to everyone that he’s unhappy. Last November, Starz accidentally posted an episode of its crime drama “BMF” a week early — an episode directed by Jackson, who is also the show’s executive producer. The cable channel pulled it down and blamed the error on a technical glitch, but Jackson later declared Starz a “shit show” on Twitter.
Starz is a shit show, they better sell it fast. They put the fucking BMF show on, then took it down. what network does shit like that? They just ruined the anticipation of The episode i directed, I WORKED HARD ON THIS. I can’t work with these people anymore. pic.twitter.com/m8whw6ARBG
— 50cent (@50cent) November 7, 2021
In March, 50 Cent threatened to leave Starz after executives renewed “Hightown” but not his latest “Power” spinoff, “Force.” “This is me packing my stuff, Starz. Sucks, my deal is up over here I’m out. They renewed Hightown and Force is the highest rated show they have sitting in limbo. If I told you how much dumb shit I deal with over here,” he wrote on Instagram. That post was later deleted, which Starz executives can (and probably will) point to as a good sign.
Another reason for optimism comes from Starz’s streaming-subscriber growth.
Starz ended the January-March quarter with 35.8 million global subscribers (23 million domestic and 12.8 million international). Year over year, Starz added 6.5 million global subscribers, with almost all growth outside the U.S. Starz, which is available in 63 countries, expects to reach 50 million-60 million global subscribers by 2025.
That’s attractive for a suitor like Roku, the streaming-device manufacturer that entered the streaming originals space when it acquired the Quibi portfolio, adapted the 1994 Kevin Spacey movie “Swimming With Sharks” into an original series, and revived the cancelled NBC series “Zoey’s Extraordinary Playlist” via a Christmas movie.
“The main impetus for the separation is that we don’t feel like [Wall Street] is giving us the value for the sum of the parts,” Feltheimer explained on the earnings call.
Analysts agree: “Our thesis on [Lionsgate] is that it’s worth more apart than together as we primarily think the studios are a rare gem,” the equity analysts at Wells Fargo wrote in their May 27 report. Added Benchmark, “The new Starz will have more latitude for strategic and financial decisions as well as in-house programming creation, with Lionsgate’s studio business gaining similar independence.”
Among the factors that give analysts — and Lionsgate — confidence is the March close of Amazon’s MGM acquisition for $8.45 billion. Lionsgate would be happy with one-third of that price tag: They know Starz is not MGM, and John Wick is no James Bond.