Comcast And Starz Reach Carriage Deal; Lionsgate, NBCUniversal Swap Streaming Fare – Update

Comcast Starz

UPDATED with stock movement, Wall Street reaction. Resolving a closely tracked negotiation, Comcast and Starz said Monday they have entered into a long-term carriage deal, more than a week before the December 31 expiration date for the previous contract.

Along with the pay-TV agreement, a content deal was also announced between Starz parent Lionsgate and Comcast’s NBCUniversal. That pact will see programming from Lionsgate’s library go to NBCU’s forthcoming streaming service Peacock, with NBCU fare streaming on StarzPlay.

Lionsgate’s Class A shares jumped more than 8% on the news, finishing at $10.87. The discussions with Comcast have been putting a chill on shareholder sentiment in recent weeks, even though there were indications the companies would avoid a disruption of service, which would have been costly on both sides.

Comcast shares were essentially flat, closing at $44.10.

The carriage deal provides “a path to an orderly transition to an à la carte business,” in the words of the official announcement. It ensures that Starz networks will continue to be carried on Comcast’s Xfinity TV. The resolution will come as a relief to fans of Power, the long-running Starz drama, whose new season is premiering in early January.

The business model of premium cable networks has undergone dramatic changes in recent years, as programmers have made streaming apps available directly to the consumer. More than half of Starz revenue now comes from à la carte streaming, as opposed to subscriptions acquired through traditional pay-TV distributors, which take fees for distributing through their systems.

“We are pleased that we were able to extend the partnership to Peacock and other businesses within Comcast while also ensuring Xfinity customers continue to enjoy great Starz programming,” said Dana Strong, President of Consumer Services for Comcast Cable. “We look forward to continuing our longstanding partnership with Comcast to deliver great content and great value to our customers,” said Starz President and CEO Jeffrey Hirsch. “Our ongoing relationship with Comcast reflects our ability to unlock opportunities across all of our businesses to the benefit of our subscribers.”

Financial terms were not disclosed but Wall Street has been closely monitoring the situation. As a year of carriage strife draws to a close, many investors and analysts have pointed to the Comcast-Starz struggle as a bellwether, given its mix of traditional pay-TV and streaming. Back in September, Lionsgate vice chairman Michael Burns took note of the negotiations during an appearance at an investor conference. He warned that talks “could get nasty” and the companies could “go to war.”

Todd Juenger, an analyst at Bernstein, wrote it a note to clients that the settlement may not hurt Lionsgate shares, but he raised questions about the long-term trajectory. “We don’t know what the ‘path’ looks like, and we don’t know what price Comcast will ultimately pay for Starz a la carte,” Juenger wrote. “It seems likely to us that Starz will ultimately end up getting paid significantly less than they had before.” As to the streaming exchange, he added, “We believe Comcast had far superior leverage in the negotiation, so we expect Comcast got favorable terms, in exchange for smoothing the transition to à la carte.”

Other analysts were more bullish. Alan Gould of Loop Capital said the deal “reduces uncertainty and increases the likelihood of a capital raise at the Starz level,” which would lower Lionsgate’s overall debt.

Doug Creutz of Cowen & Co. said he had predicted a carriage deal would get done. In a note to clients, Creutz expressed several positive takeaways, including his expectation that an “M&A premium” would return to Lionsgate shares now that “potential M&A suitors now also have visibility on the company’s cash flows.” Earlier in 2019, with its film operation rebounding and questions looming over Starz, Lionsgate shares fell to a multi-year low at around $7. It held discussions with CBS about a possible takeover of Starz, but those talks fell apart on price.

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