Like most companies, Lionsgate and Starz prefer to keep their long term financial forecasts under wraps. That’s why Wall Street was so interested in the projections, and other disclosures, included today in a 732-page SEC filing for the studio’s $4.4 billion cash and stock agreement to buy the premium networks owner.
Lionsgate figures that — if it remained a standalone business — revenues would increase 21.7% to $3.5 billion in the fiscal year ending March 2021, with free cash flow up 181.7% to $262 million.
Starz figures its standalone revenues would increase 17.2% to $2.0 billion , with free cash flow up 41.9% to $335 million.
With a merger, they see a 20% increase in revenues to $5.5 billion, with free cash flow up 104.2% to $774 million.
The document warns investors not to consider the “internal financial projections” as “predictive of actual future events” or “appropriate for other purposes” other than for determining whether the deal makes sense.
Still, Stifel analyst Benjamin Mogil says the companies are more optimistic about their 2018 performance than he is. “For [Lionsgate], our estimates reflected the move of the Divergent installment directly to TV, and it is unclear if the [Lionsgate] projections do the same,” he says.
His estimates for Starz are “similarly lower” due to his expectation that DirecTV, now owned by AT&T, will end up reducing its outlays for the premium channels, as well as subscriber losses as new Disney releases move to Netflix for their first runs in the pay TV window. That begins with productions that hit the theaters this year.
The document also discloses that if Starz pulls out of the deal then it will pay Lionsgate a $150 million break-up fee. Lionsgate would pay the same amount to Starz if the studio’s shareholders reject the deal — and $175 million if Lionsgate changes its mind. Starz could collect $250 million if Lionsgate can’t raise the debt financing it needs for the deal.
The debt is important. Lionsgate had $887.9 million in debt and $690.4 million in production loan obligations at the end of March. After the Starz acquisition, its debt will soar to $3.82 billion, also with $690.4 million in production loan obligations.
The company warns that it might become vulnerable to shifts in interest rates, and have less cash for operations. Lionsgate won’t pay a dividend.
One of the big attractions of the merger for Starz investors — especially Liberty Media’s John Malone, the controlling shareholder — is that a union with Lionsgate will enable it to pay Canada’s lower tax rates. The companies anticipated a drop from nearly 35% to about 15% — a potential savings of $83 million a year.
But that’s not guaranteed. Some “relatively new and complex” changes in the U.S. laws to restrict tax inversions provide “no assurance that the Internal Revenue Service will agree with the position that Lionsgate should not be treated as a U.S. corporation for U.S. federal tax purposes.”
The company anticipates operating savings and synergies exceeding $50 million a year. That plus “Lionsgate’s attractive Canadian tax domicile should yield an incremental $150 million in tax savings on an annual basis through 2021,”Piper Jaffray’s Stan Meyers says.