CBS Plus Starz Could Be Valuable in Viacom Merger 

Aimee Spinks/Starz
Starz' 'Outlander' was renewed for seasons five and six at the premium cabler.

If the broadcaster nabs the premium channel, it would boast a digital bundle with about 15 million subscribers, which could be combined with Viacom assets owned by Shari Redstone.

When word leaked May 17 that CBS Corp. may have offered Lionsgate $5 billion for Starz, shares of the latter leaped 15 percent as Wall Street recognized how a sale would benefit the company run by CEO Jon Feltheimer.

Less obvious is what CBS might get out of it, as Starz appears duplicative of CBS' Showtime. And CBS shares fell after the reported bid for Starz. In large measure, such an acquisition would be about battling AT&T's HBO, which has 140 million worldwide subscribers, 8 million by way of streamer HBO Now.

But bankers and analysts say the combination could create a stronger rival for AT&T-owned WarnerMedia's HBO. "If antitrust regulators agree to allow the reduction of the core U.S. pay TV premium marketplace from three to two, the Showtime-Starz combination would provide significant new competition to HBO, for sure," says Jimmy Schaeffler of The Carmel Group.

The deal could also further increase CBS' scale at a time when scale is a focus for CBS watchers as the company  might decide to merge with Viacom. Wall Street folks believe a CBS-Viacom deal could happen in the near future, as both are controlled by Shari Redstone and the recurring talk about such a combination once again surfaced this week. Discussions between Viacom and CBS could start in mid-June, according to latest Wall Street chatter and a report by CNBC.

As far as leveraging a potential Starz acquisition goes, CBS could combine the digital offering of Starz with that of Showtime, or even bundle them under the CBS All Access umbrella. All Access and Showtime OTT each boast about 4 million subs, but CBS predicts they'll reach 25 million combined by 2022.

"Lionsgate and Starz have positioned the Starz programming to be complementary rather than directly competitive to Showtime and HBO in terms of the demographic targeting," Barrington Research analyst Jim Goss tells THR. "Starz is appealing to demographics that are underserved by HBO and Showtime, including female, African-American and Hispanic. Therefore, a Showtime/Starz combination would arguably reach a broader cross section of the population."

One banker said that Starz’s original content, such as Power, and the international expansion of its Starz Play streaming service would be particularly appealing for CBS amid the industry-wide rush to direct-to-consumer offerings. CBS acting CEO Joe Ianniello recently touted the upside opportunity for international streaming growth for the company as a new focus area. "With nearly 7.5 billion people living outside the United States, the international marketplace presents a huge opportunity for further long-term growth," he said on the company’s May 2 earnings conference call.

Starz, which has 24.7 million subscribers, with 4 million by way of the Starz streamer in the U.S. and 3 million internationally, was valued at about $4.4 billion when Lionsgate purchased it in 2016, and the company reportedly won't consider anything less than $5.5 billion for it — even though Wall Street values it at $3.2 billion, or $14.85 a share, according to Robert Routh of FBN Securities.

That share price is nearly as much as what the Class-A Lionsgate shares trade for, raising the question: Why doesn't CBS acquire all of Lionsgate?

"I can't imagine Lionsgate sells just Starz unless it is a blockbuster bid," says Northlake Capital Management's Steven Birenberg. "A standalone studio is barely worthy of being a public company."

Indeed, on May 23, Lionsgate reported quarterly revenue of $914 million, shy of expectations. For fiscal 2018, the company lost $284 million. "The best option for CBS right now, especially in light of big moves by big rivals, is for CBS to buy all of Lionsgate," says Schaeffler.

Lionsgate has big plans for the Starz streamer, now in 42 countries and expanding to 51 by July 1. "The international market is a $45 billion opportunity," Feltheimer said May 23, noting that the international version of the Starz streamer can reach 25 million subs by 2025, though the expansion will cause losses of as much as $150 million in fiscal 2020 alone.

Todd Juenger of Bernstein figures that if Lionsgate's goal is met, the international version of the Starz streamer will be worth $3.8 billion. But Juenger has his doubts about the growth trajectory of the Starz streamer, what with Disney+ set to launch Nov. 12 at $6.99 a month, $2 cheaper than what Starz streaming charges in the U.S. He adds, "Anyone can copy Disney's playbook, but not everyone is Disney."

This story first appeared in the May 29 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.