Lionsgate Faces Wall Street Skepticism as It Bets on Starz

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Wall Street watchers see added growth and better economics for the company's direct-to-consumer offering and more tie-ins with other OTT platforms beyond Roku and Amazon Prime.

Lionsgate's investors have faced their own Hunger Games the past two years, as the Jon Feltheimer-run company's stock price fell to about $9.46 as of Wednesday since peaking at $33.84 at the beginning of 2018. 

But the company is eyeing new distribution strategies to ensure streaming-era survival for Starz. The company had faced investor skepticism amid negative financial surprises like media mogul John Malone selling his shares in the studio and CBS reportedly pursuing Starz, only to recombine with Viacom. 

Also clouding investor visibility for 2020 is the Comcast carriage dispute for Starz hitting a major roadblock as the premium channel pivots in the cord-cutting era to a la carte subscribers, online and international. And Lionsgate has not yet landed an investment partner for Starz Play International, the direct-to-consumer streaming version of Starz facing a costly international $150 million to $200 million expansion.

So heading into next year, an impatient Wall Street is looking for signs of a share price rebound for Lionsgate. "A lot of things can happen. The real question is … how long will investors wait because we're getting to the end of the year, some investors are like Warren Buffett and think long term, but a lot of them want to know where they'll be at the end of the quarter. That's how they get paid," FBN Securities analyst Robert Routh says.

As the Comcast dispute reaches a crunch and Starz looks set for a more expensive a la carte position for Xfinity subscribers, Wall Street watchers see added growth and better economics for Liongate's direct-to-consumer offering and more tie-ins with other OTT platforms beyond Roku and Amazon Prime.

An example: Disney+ has been running a pop-up ad that prominently markets Starz's OTT offering in a bid by Walt Disney to more easily recover the streaming rights to popular Star Wars and Marvel titles that were earlier licensed out to Starz.

The short-term disruption from the Comcast dispute is expected to be offset if Starz lands enough new a la carte subscribers who positively pay for the premium service, and watch it.

"We would assume they would lose a majority of those [Comcast] subscribers if they went to a la carte. And they could grow them back over time, but of course they would get a higher fee directly from the consumer for that," Macquarie analyst Tim Nollen says about recovering lost revenue from the Comcast fixed price deal.

“They are growing nicely with their streaming service, which has offset the linear declines, and they retain a higher per-capita amount from streaming or a la carte than from Comcast,” adds Dennis Leibowitz, fund manager at ACT II Partners, which holds Lionsgate stock. "So although whatever happens is going to hurt, the market is assuming the worst."

Starz currently has around 24.7 million domestic subscribers and 3.5 million international customers for 28.2 million global subscribers in all after adding a record 1.2 million domestic OTT subscribers for a total of 5.6 million domestic OTT customers after the latest financial quarter.

Of course, with Disney+, HBO Max and Peacock either launched or coming soon, Starz faces a tidal wave of new streaming competition in 2020.

"While the Starz OTT offering has recently gained some traction in the U.S. and also in the relatively advanced stages of its international rollout (Starz Play), our overall opinion of the shares is partly informed by some questions related to the company’s long-term competitive position in a highly consolidated (and rapidly evolving) media landscape, absent indications of potentially viable take-out opportunities in the near term," says CFRA analyst Tuna Amobi in a more bearish note.

Lionsgate stock could also get a significant leg up if the studio can arrange equity financing for Starz's international rollout.

“While everyone else is doing this, they are willing to forgive the investment period for a Disney, but not for a Lionsgate,” says Leibowitz. “They have also been looking for outside partners to do an equity financing of the international part, and so far they haven’t found one.”

Elsewhere, there's no obvious buyer for Starz for now after the CBS romance faltered, but M&A chatter continues around Lionsgate and Starz, if only for a minority financial investor for Starz Play International, which could help set a floor for the studio's stock.

“Lionsgate is a very logical merger partner with other midsize studios, including MGM and Sony Pictures, and a roll-up of these would be extremely attractive as an acquisition target, in our view," Wells Fargo Securities analyst Steve Cahall argued in an investor note.

Here a question mark hangs over Malone unloading his remaining stake in the Hollywood studio to buyers international cable giant Liberty Global and Lionsgate chairman Mark Rachesky, via his MHR Fund Management: Was Malone washing his hands of Lionsgate, or getting out of a standstill agreement with Rachesky and Liberty Global and Discovery to acquire Lionsgate through Liberty Global and Discovery, or both?

"What people didn't take into account is he sold most of the stock to Rachesky and he got out of the standstill by doing that. The question is, 'Why did he want out of that, and what, if anything, is his next move?'" asks FBN Securities' Routh.

And recent box office successes for John Wick 3, Knives Out, Madea Funeral and Angel Has Fallen underline a rebounding narrative for Lionsgate's movie division. Through Dec. 1, the studio's year-to-date domestic box office market share is 6.6 percent, putting it fifth among all studios, ahead of Paramount and Fox.

But with the Lionsgate stock below $10, a suitor from among the Hollywood studios or Silicon Valley could offer Lionsgate a far better take-out deal at $20, with a 100 percent premium for investors, than last year when the company's stock neared $30.

"You couldn't have done that a year ago," says FBN Securities' Routh of Hollywood players liking to buy something at a sale price. "Worst-cast scenario, [Lionsgate] says no. So you throw in an offer, be it for Starz or the whole thing."