Starz could turn into ‘acquisition machine’ after spinoff from Lionsgate

Starz wasn't John Malone's most profitable funding. But it might be his most symbolic.

The media mogul as soon as managed Starz as an impartial firm. In 2016, he merged it with Lionsgate, one other firm he owned a bit of on the time. A yr earlier than that deal closed, Malone defined he hoped the deal could be the primary of a number of.

"Lionsgate could buy Starz and potentially other free radicals in the industry," he stated.

Written within the Starz?

Lionsgate is planning a spinoff of Starz, house of "Outlander" and "Power," by early subsequent yr. Vivendi's Canal Plus and personal fairness agency Apollo Global, in tandem with streaming distributor Roku, have each made preliminary bids for a 20% stake, sources say.A deal could be introduced as quickly as August.A publicly traded Starz could look to extend in measurement by concentrating on different subscale media and leisure corporations.

By "free radicals," Malone was referring to reasonably priced media corporations, akin to AMC Networks, which is managed by the Dolan household, or A&E Networks, co-owned by Hearst and Disney, which lacked the worldwide scale to compete with Disney and Comcast's NBCUniversal for authentic programming and A-list expertise.

While these corporations could wallow independently, banding collectively would give them steadiness sheet heft and leverage to extend programming charges on pay-TV suppliers.

Malone's imaginative and prescient by no means materialized. Lionsgate hasn't made one other acquisition of significance since Starz and has seen its market capitalization shrink in recent times. Lionsgate's present market valuation is simply over $2 billion. In 2016, Lionsgate paid $4.4 billion for Starz. Malone is not a Lionsgate shareholder, promoting the rest of his voting shares in 2019.

But even with out Malone's affect, and even amid a remodeling media and leisure panorama, Starz could carry the torch of his imaginative and prescient.

Starz to be spun

In the final six years, streaming video has change into the media world's north star. Pushing collectively corporations to realize a negotiation benefit towards pay-TV operators in carriage price disputes is anachronistic as tens of millions of Americans cancel cable annually. Investors have considered Lionsgate as an also-ran within the streaming wars.

That's led Lionsgate's administration and board to resolve spinning off Starz is its finest plan of action. As a part of the Starz spinoff, a minority stake will probably be bought to assist set a market valuation for the brand new public firm. Vivendi's Canal Plus and personal fairness agency Apollo Global, in tandem with streaming distributor Roku, have each made preliminary bids for a 20% stake, based on individuals accustomed to the matter.

Starz and Lionsgate "will do great trading separately," stated Jimmy Barge, Lionsgate's chief monetary officer, earlier this month. "They can pursue their own initiatives, opportunities that might not otherwise arise for the combined company."

A deal could be introduced as quickly as Aug. 4, Lionsgate's estimated subsequent earnings date, the individuals stated. A spokesperson for Starz declined to remark.

As an preliminary valuation, based mostly on the minority stake sale, Starz will probably be pegged someplace between $2 billion and $4 billion, stated the individuals, who requested to not be named as a result of the discussions are personal. In different phrases, Starz alone could also be valued with a better market valuation than Starz and Lionsgate mixed.

After the spinoff

A publicly traded Starz should get greater to compete with Netflix, Disney, Warner Bros. Discovery, Paramount Global, NBCUniversal, Apple and Amazon within the streaming wars. Even a number of of these corporations might not be giant sufficient on their very own.

Starz has 24.5 million world streaming subscribers. When mixed with Starz's premium cable community, which competes with HBO and Showtime, it has 35.8 million subscribers worldwide. For comparability, Netflix has 222 million world subscribers.

Starz tends to deal with feminine and Black audiences and has had some success with reveals together with "Power," "Outlander" and "Gaslit," the just lately launched sequence about Watergate based mostly on season one of many "Slow Burn" podcast, starring Sean Penn and Julia Roberts.

"Starz seems to have strong content but is struggling to attract attention," JPMorgan analyst Philip Cusick wrote in a be aware to purchasers. "This is in line with our thesis that streaming is a scale business, and we believe Starz content is better in another distributor's hands."

Lionsgate has tried to promote Starz for years. It received pretty shut in 2019, practically placing a cope with CBS. That sale by no means crossed the end line as a result of vice chairman and controlling shareholder Shari Redstone selected as a substitute to push Viacom along with CBS. While former CBS Chief Executive Officer Joseph Ianniello had curiosity in buying Starz, Bob Bakish, the CEO of the mixed ViacomCBS, now named Paramount Global, didn't share his imaginative and prescient, two of the individuals stated.

Every giant media firm has finally determined to not purchase Starz. Buying a subscale streaming service with ties to the legacy pay-TV mannequin is a tough promote for Wall Street. Investors don't need to see giant media corporations spending their acquisition money on offers that don't transfer the needle on future progress.

Ways for Starz to develop

Starz CEO Jeffrey HirschSupply: Starz

That offers Starz one different path to get greater shortly: purchase or merge with different corporations, itself. Two doable targets are, as soon as once more, AMC Networks and A&E Networks. AMC Networks has a market valuation of $1.3 billion. An AMC spokesperson declined to touch upon a possible merger. An A&E spokesperson didn't instantly reply for remark.

Investors could also be way more sanguine on Starz and AMC Networks merging than a bigger firm choosing off smaller rivals. Bulking up in a sequence of offers received't make Starz a serious participant in a single day. But it could give it the dimensions to accumulate carve outs and divestitures from different giant media corporations. Over time, Starz could conceivably change into a media firm with sufficient scale to be a aggressive risk. Or, on the very least, not an afterthought.

Starz CEO Jeff Hirsch hinted at this risk in an interview with CNBC in 2020.

"You'll see these big six players, but over time they'll also start to look at their portfolio of assets and say 'ok, does this fit?'," Hirsch stated. "You'll start to see assets fall out of those big six that will then constitute a new four or five that will come up. You've still got Sony, MGM, Lionsgate, AMC. John Malone has talked about putting some of these smaller dots together." (MGM has since been acquired by Amazon.)

It's doable AMC Networks and A&E will balk at promoting. But they, too, discover themselves as legacy holdovers — homeowners of cable networks with declining values. Starz could act as a kind of "horizontal acquisition machine" within the coming years to remain viable.

If you've heard that phrase earlier than, that's as a result of somebody used to it describe his intensions in taking a stake in cable firm Charter Communications again in 2013.

That individual was Liberty Media Chairman John Malone.

WATCH: Liberty Media Chairman John Malone on fairness markets and streaming companies

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