Lionsgate Buying Starz for $4.4 Billion

30 Jun, 2016 By: Erik Gruenwedel

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Deal combines Lionsgate home entertainment unit with Anchor Bay Home Entertainment

As expected, Lionsgate June 30 announced it is acquiring Starz, the Englewood, Colo.-based premium TV network, in a cash and stock deal worth $4.4 billion.

The agreement has been approved by the boards of directors of both companies, and will be submitted to their respective shareholders for approval as well as to regulatory authorities. The proposed creation of Lionsgate non-voting stock is also subject to shareholder approval. THe deal is expected to close by the end of the year.

The transaction — which has been speculated ever since John Malone, chairman of Liberty Media Corp. and founder of Starz, acquired a minority stake in Lionsgate — is significant for Lionsgate, which has been seeking to expand distribution channels globally, in addition to upping digital distribution via subscription streaming.

The deal significantly increases the combined company’s content creation capabilities and enhances its scripted programming footprint across mobile, broadband, cable and satellite platforms. It also paves the way for a broad range of new content partnerships and accelerates the growth of Lionsgate and Starz’s own OTT services. In addition, the acquisition is expected to generate significant revenue and cost synergies.

To illustrate the scale of the transaction, the combined companies encompass a 16,000-title film and television library; the largest independent television business in the world, including 87 original series on 42 U.S. networks; a feature film business that has generated more than $7 billion at the global box office over the past four years; operation of or investment in 30 channel platforms around the world, including the flagship Starz platform reaching 24 million U.S. subscribers, the Starz Encore network with over 32 million subscribers and five OTT services; and a growing presence in location-based entertainment and video games driven by the company’s deep portfolio of brands and franchises.

Starz original programming includes "Outlander," "Black Sails," "Ash vs Evil Dead," "Survivor’s Remorse" and "Power."

For Anchor Bay Home Entertainment, a Starz unit and retail distributor of The Weinstein Co. movies, it's business as usual. Starz, which is ending distribution of Disney movies in the pay-TV window, currently distributes Sony Pictures titles in the pay-TV window.

Starz Distribution — which includes Anchor Bay Home Entertainment — reported a 15% first-quarter revenue decrease to $92.7 million. Operating income decreased $15.7 million to $9.7 million, from $25.4 million, which the distributor attributed to year-over-year comparisons with licensing select original series to Netflix and Amazon Prime Video.

Meanwhile, Lionsgate generated about $215 million in Q1 home entertainment revenue, driven in part by disc and digital sales of The Hunger Games: Mockingjay — Part 2, Sicario and The Last Witch Hunter — the Vin Diesel box office disappointment that over-indexed at retail.

The home entertainment unit generated more than $640 million in revenue from movies and TV product in fiscal 2016, which was down from $707.5 million in the prior year, reflecting the composition and performance of the slates of theatrical titles. 

“This transaction unites two companies with strong brands, complementary assets and leading positions within our industry,” Lionsgate CEO Jon Feltheimer and vice chairman Michael Burns said in a statement. “We expect the acquisition to be highly accretive, generate significant synergies and create a whole that is greater than the sum of its parts. [Starz CEO] Chris Albrecht and his team have built a world-class platform and programming leader, and we’re proud to marshal our resources in a deal that accelerates our growth and diversification, generates exciting new strategic content opportunities and creates significant value for our shareholders.”

Notably, Albrecht just renewed his employment contract through 2020, including adding the position of president. In the analyst call regarding the deal, Feltheimer said he looked forward to working with Albrecht in the combined companies.

"We expect Chris to not only run Starz, but also to have a major participation stake in the combined company, including joining our executive committee," Feltheimer said. 

The CEO indicated Lionsgate would be re-evaluating its stake in Epix, the multi-tiered distribution platform co-owned by Viacom and MGM. 

“We’ve been very pleased with the performance of Epix, but the fact of the matter is that at 31% [ownership stake], Epix is not truly a strategic platform for us and I think our partners have known about the possibility of this transaction for some time."

The executive said he looked forward to future discussions with MGM, Viacom and Paramount Pictures regarding “maximizing” their mutual investment.
Feltheimer said the Starz acquisition provides “great opportunities” for enhanced synergies involving the companies’ over-the-top video strategies. In addition to the recently launched Starz app, Lionsgate operates the Tribeca Shortlist subscription streaming service and a joint venture with San Diego Comic-Con International.

“The Starz app is doing extremely well, particularly on the Amazon platform. I can’t imagine we won’t have a smart strategy about consolidating infrastructure and expanding a portfolio of services together,” he said.

Regardless, the merger would appear to underscore Hollywood’s continued move toward targeting consumers directly, and whether competing studios will want to distribute content through a Lionsgate-controlled channel going forward.

“The question now is how willing studios will be to license their movies to Starz. I’m not sure,” said Mike Goodman, director of digital media strategies at Strategy Analytics.

He contends obtaining mandatory regulatory approval is no slam-dunk either. In the 1950s federal court decisions forced studios to separate production from distribution, which meant Hollywood could no longer control movie theaters screening its content.

Goodman said regulators have been skeptical ever since about allowing studios to regain distribution control — a reality he said was revealed 14 years ago when studios partnered to create online video service Movielink.

Movielink, which limited watching digital content to a computer, was eventually sold to Blockbuster in 2007, and now operates as Blockbuster On Demand. Blockbuster video stores shut down in 2011.

“The Feds allowed [Movielink], but carefully scrutinized its operations for potential collusion. Making it difficult, if not impossible, for Movielink to operate efficiently,” Goodman said.

 

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