Lionsgate raised expectations for a deal in a SEC filing last week that said it planned to discuss “a potential mutually beneficial combination of the two companies.” That provided a boost for Starz shares. Its investors — including Liberty Media’s John Malone, its controlling shareholder — have been eager to see the premium networks company find a partner to help it compete with rivals including HBO, Showtime and Netflix .
But hopes for a deal were dashed later in the day when Lionsgate released an earnings report for the last three months of 2015 that fell far short of Wall Street’s expectations, due in part to disappointing results for The Hunger Games: Mockingjay Part 2. The studio attributed that to the terrorist attacks overseas as well as the over-performance of Disney’s Star Wars: The Force Awakens.
The news sent Lionsgate shares plummeting 27% on Friday, while Starz fell more than 22%.
The dramatic changes make it difficult for either side to figure out how much Starz is worth, and how to value any Lionsgate shares that it might want to include in an offer.
Both companies declined to comment. Starz may face questions about its plans on February 25 when it releases its earnings for the end of 2015, and holds its quarterly call with analysts.
Although they’ve tabled the idea for now, talks could restart. In its earnings call with analysts on Friday, Lionsgate CEO Jon Feltheimer said that “we like the [premium networks] space, we like the optionality of having ownership in these platforms, and I think going forward there’s all kinds of combination, interesting thing is going to happen when you are playing in this arena.”
Vice Chairman Michael Burns added that the studio typically likes transactions that add to earnings, for example by enabling it to cut duplicative costs. If there was no way to do that then “I wouldn’t expect us to do any deal.”
Lionsgate already owns 14.7% of the voting shares in Starz following a stock swap early last year with Malone. That deal gave him a 3.4% stake in Lionsgate and a seat on its board. Lionsgate also is a part owner of Epix, a three-way joint venture with Viacom and MGM.
B. Riley analyst Eric Wold says that he still believes a Lionsgate-Starz deal is possible, and that the studio’s investors have already folded that likelihood into their assessment of its value.
Bernstein Research’s Todd Juenger says that with the fall in Lionsgate’s value, there’s now also a chance it could be bought — including by Starz, which currently is the smaller of the two companies. If Lionsgate’s value doesn’t pick up in a year or more “then they would have to consider any such offer.”