Analysts Question Wisdom of Starz-Lionsgate $4.4 Billion Merger

John Malone Jon Feltheimer Split - Getty - H 2016
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John Malone Jon Feltheimer Split - Getty - H 2016

"It's not what companies should be doing — paying a premium to diversify your business," says one.

Media mogul John Malone is optimistic about the $4.4 billion combination of mini-studio Lionsgate and premium cable outlet Starz. He told reporters July 7 at the Allen & Co. retreat in Sun Valley that it would give Starz "the opportunity to be bigger, be a little more aggressive in investing in content." Malone, who owns big stakes in both companies, is hoping the deal will create a new major player.

If only Wall Street was on board. So far, several analysts have cast doubt on the pair coming together. They feel it might not be enough to stave off financial hemorrhaging in the era of streaming and cord-cutting. Cowen & Co. analyst Doug Creutz doesn't see anchoring Lionsgate to a "second or third tier" premium cable network as helping much in the hunt for new franchises in the post-Hunger Games era. "It's not what companies should be doing — paying a premium to diversify your business," Creutz tells THR, adding he advises investors to buy into other companies to hedge any bets on Lionsgate.

As of July 11, Lionsgate traded at just $19.21, down from a June 30 close at $23.04 after the Starz deal was announced. Meanwhile, stock in Starz was trading at $29.70, just seven cents higher than the day after the merger.

In May, a record showing from its TV business helped Lionsgate offset box-office stumbles for Allegiant and Gods of Egypt and beat profit estimates with its most recent quarterly results. That was far better than disappointing third-quarter earnings in February that followed soft box office for The Hunger Games: Mockingjay — Part 2 and had studio shares sliding 27 percent.

During a June 30 conference call following the deal's unveiling, Lionsgate CEO Jon Feltheimer emphasized it "increased scale to compete even more effectively and capitalize on growth opportunities in a fast-changing marketplace." While consumers currently can access original Starz content via an add-on subscription on Amazon Prime, what's unclear is how Malone, Feltheimer and Starz CEO Chris Albrecht expect the outlet to better compete against HBO, Showtime and such digital rivals as Netflix, Amazon Prime and Hulu.

"If we are concerned about HBO and Showtime in an increasingly competitive landscape, then we must also be concerned for Starz," says Sanford C. Bernstein analyst Todd Juenger. And now, also, for Lionsgate.

This story first appeared in the July 22 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.