Lionsgate Shares Slump On Spotty Q4 Report, Investor Questions About Starz Global Plan – Update

UPDATED with closing price, additional analyst comment: Lionsgate’s stock, which has dropped nearly 40% in the past year, fell nearly 7% Friday in the wake of a disappointing fourth-quarter earnings report and questions about the company’s plan to invest in the global rollout of Starz.

Shares finished at $14.89, which is within sight of their 52-week low of $12.94, established on May 15. The stock had sold off in after-hours trading yesterday in the wake of the quarterly numbers, which fell significantly short of Wall Street estimates. The major stock indices ended the day modestly positive.

In a conference call with analysts on Thursday evening, Lionsgate said it expects to ramp up its investment in the Starz global push by hundreds of millions of dollars in the next few years. It estimates having between 15 million and 25 million subscribers worldwide by 2024. Starz currently has 4 million streaming subscribers in the U.S., where its efforts have been focused until recent quarters. The premium network has 3 million international subscribers, largely through StarzPlay Arabia, a venture with Bell in Canada and an Amazon Prime partnership in Europe. Canada is the only territory outside the U.S. in which Starz currently has linear carriage, so streaming is the anchor of the international strategy.

CEO Jon Feltheimer did not address reports of a recent offer by CBS to pay $5 billion for Starz, instead affirming the company’s long-term belief in Starz, which it acquired for $4.4 billion in 2016. “We have a plan,” Feltheimer said. “We’re super-confident about it. We’re executing on the plan. We felt that the window of opportunity [for expansion] was now.”

Todd Juenger at Bernstein reasserted his “market perform” rating on Lionsgate’s stock, preserving his 12-month price target of $17 a share. The headline of Juenger’s report to clients Friday sums up his takeaway from the earnings call: “Anyone Can Copy Disney’s Playbook, But Not Everyone Is Disney.” He questions whether Lionsgate has enough muscle to compete in the big leagues of streaming. “We believe the table stakes of content spend to attract and retain subs, plus [subscriber acquisition costs], will overwhelm niche services like Starz,” he wrote.

Despite management’s vows of loyalty to Starz, Juenger believes a deal with CBS is a possibility.

“The industrial logic behind CBS’ supposed interest in Starz makes sense to us,” Juenger wrote. “We believe Starz is more valuable to CBS (synergized and packaged with Showtime, and other CBS content/assets/services) than it is to Lionsgate. Which means a deal ought to exist which creates value for shareholders of both companies. But that deal will never happen if Lionsgate’s management and board believes Starz Play International could be worth $3.8 billion (in 6 years) on top of Starz domestic (for which they paid $4.4 billion).”

Doug Creutz at Cowen rates the stock “outperform,” but trimmed his price target from $27 to $23 along with lowering estimates for revenue and profit for fiscal 2020. In a note to clients, Creutz expressed his view that a CBS deal for Starz is “unlikely,” and said discussions may have been prompted by Lionsgate’s recent “capital constraints.”

On the upside, Creutz noted that Starz has been included in Apple’s beefed-up TV efforts, which is expected to derive most of its revenue from the sale of third-party app subscriptions, as Amazon and Roku currently do. The buildout of Starz globally, the analyst added, is an “incremental opportunity” that won’t be apt to cannibalize Lionsgate’s other businesses.

Alan Gould at Loop Capital Markets sees potential for a deal with CBS or another suitor for Starz, despite the fact that it would be “a complete reversal of strategy.”

With $2.7 billion in net debt and considerable spending ahead on the streaming ramp-up, a sale would offer investors some relief, even if it would also make the rest of Lionsgate a potential acquisition target. “For CBS,” Gould wrote in a note to clients, “Starz would provide $500 million per year of additional cash flow which could help with its next NFL negotiations, there should clearly be synergies with Showtime, and it would further diversify CBS away from advertising.”