Starz Could Turn Into ‘Acquisition Machine’ After Lionsgate Splits It

Liberty Media’s John Malone

Michael Kovac | Getty Images

By “free radicals,” Malone was referring to affordable media companies, such as AMC Networks, which is controlled by the Dolan family, or A&E Networks, co-owned by Hearst and Disney, which lacked global scale. to compete with Disney and Comcast. NBCUniversal for original programming and top talent.

While these companies may wallow independently, banding together would give them balance sheet leverage and leverage to raise the programming fees of pay-TV providers.

Malone’s vision never materialized. Lionsgate hasn’t made another significant acquisition since Starz and has seen its market capitalization shrink in recent years. Lionsgate’s current market valuation is just over $2 billion. In 2016, Lionsgate paid $4.4 billion for Starz. Malone is no longer a Lionsgate shareholder, selling the remainder of his voting stock in 2019.

But even without Malone’s influence, and even amid a rapidly changing media and entertainment landscape, Starz could carry the torch of his vision.

Starz to spin

Over the past six years, streaming video has become the north star of the media world. Pushing the companies together to gain a bargaining advantage against pay-TV operators in carriage fee disputes is anachronistic, as millions of Americans cancel cable every year. Investors have seen Lionsgate as a contender in the streaming wars as well.

This led Lionsgate’s management and board to decide that splitting off Starz was its best course of action. As part of the Starz spin-off, a minority stake will likely be sold to help establish a market valuation for the new public company. Vivendi’s Canal Plus and private equity firm Apollo Global, in tandem with streaming distributor Roku, have both made preliminary offers for a 20% stake, according to people familiar with the matter.

Starz and Lionsgate “will make great trades separately,” Jimmy Barge, Lionsgate’s chief financial officer, said earlier this month. “They can pursue their own initiatives, opportunities that might not otherwise arise for the combined company.”

A deal could be announced as early as August 4, the estimated date for Lionsgate’s next results, the people said. A Starz spokesperson declined to comment.

As an initial valuation, based on the sale of the minority stake, Starz will likely be pegged between $2 billion and $4 billion, said the people, who asked not to be named because the discussions are private. In other words, Starz alone can be valued with a higher market valuation than Starz and Lionsgate combined.

After the spinoff

A publicly traded Starz will need to grow to compete with Netflix, Disney, Warner Bros. Discovery, Paramount Global, NBCUniversal, Apple and Amazon in the streaming wars. Even many of these companies may not be big enough on their own.

Starz has 24.5 million streaming subscribers worldwide. When combined with Starz’s premium cable network, which competes with HBO and Showtime, it has 35.8 million subscribers worldwide. For comparison, Netflix has 222 million subscribers worldwide.

Starz tends to focus on female and black audiences and has had some success with shows such as “Power,” “Outlander” and “Gaslit,” the recently released Watergate series based on the podcast’s first season.” Slow Burn”, with Sean Penn and Julia Roberts.

“Starz appears to have strong content but struggles to capture attention,” JPMorgan analyst Philip Cusick wrote in a note to clients. “This aligns with our thesis that streaming is a big business, and we believe Starz content is better off in the hands of another distributor.”

Lionsgate tried to sell Starz for years. He got pretty close in 2019, almost making a deal with CBS. That sale never crossed the finish line as Vice President and majority shareholder Shari Redstone opted to push Viacom with CBS instead. While former CBS CEO Joseph Ianniello was interested in acquiring Starz, Bob Bakish, CEO of combined company ViacomCBS, now named Paramount Global, did not share his vision, two of the people said.

All major media companies ultimately decided not to acquire Starz. Buying a subscale streaming service tied to the old pay-TV model is a tough sell for Wall Street. Investors don’t want to see big media companies spend their acquisition money on deals that don’t advance future growth.

Ways for Starz to grow

Jeffrey Hirsch, CEO of Starz

Source: Starz

This gives Starz another avenue to grow quickly: acquire or merge with other companies, itself. Two possible targets are, again, AMC Networks and A&E Networks. AMC Networks has a market valuation of $1.3 billion. An AMC spokesperson declined to comment on a possible merger. A spokesperson for A&E did not immediately respond for comment.

Investors may be far more optimistic about the Starz and AMC Networks merger than a larger company picking smaller rivals. Banding together in a series of deals won’t make Starz a major player overnight. But that could give it the scale to acquire carve-outs and divestments from other big media companies. Over time, Starz could eventually become a media company with enough scale to pose a competitive threat. Or, at the very least, not an afterthought.

Starz CEO Jeff Hirsch hinted at this possibility in a 2020 interview with CNBC.

“You’ll see these big six players, but over time they’ll also start to look at their portfolio of assets and be like ‘ok, is that okay? ‘” Hirsch said. “You’ll start to see assets falling from these big six which then will make up four or five new ones that will pop up. You still have Sony, MGM, Lionsgate, AMC. John Malone talked about putting some of these smaller dots together.” (MGM has since been acquired by Amazon.)

AMC Networks and A&E may be reluctant to sell. But they, too, find themselves as legacy remnants – owners of cable networks with declining values. Starz could act as a kind of “horizontal acquisition machine” in the coming years to remain viable.

If you’ve ever heard that phrase, it’s because someone used to outline their intentions in taking a stake in cable company Charter Communications in 2013.

That person was the president of Liberty Media, John Malone.

WATCH: Liberty Media chairman John Malone on stock markets and streaming services

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