Lions Gate’s Spinoff of Starz Is the Next Big Test for Streaming

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A Starz billboard in Los Angeles.

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photo by roger kisby

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How much are streaming-media businesses worth these days is an open question. Watch Lions Gate Entertainment to know more.

Netflix has seen a high-profile drop in subscribers following a high-profile drop in valuations over the past few months and as investors grow more skeptical about the business model’s eventual avenues for profit. That’s not stopping Lions Gate from pursuing a spinoff of its Starz streaming unit as soon as this summer.

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The company’s management updated investors on those plans on Thursday’s earnings call and said discussions were ongoing with “bankers and a number of potential strategic and financial partners.” Lions Gate believes that its studio business and Starz will separately receive higher overall valuations than what is currently under one roof.

That may be true, but Starz’s valuation in an eventual spinoff is highly uncertain and will be tied to other publicly traded streaming dramas. This will be the next test of market appetite for the streaming business.

Lions Gates Fiscal Fourth Quarter 2022 ResultsThursday evening’s report was mixed, and management’s forecasts didn’t sway Wall Street either. Voting shares of Lions Gate (ticker: LGF.A) were down 6% late on Friday afternoon, while its nonvoting stock (LGF.B) fell 5%.

Without Starz, Lions Gate would be left with a studio focused on TV and film production. That stand-alone business may be an arms dealer of sorts in the current streaming wars, offering shows to other services; Starting films in theaters and continuing shows on TV; and licenses its library of series and movies to other media companies.

Starz is currently distributed through cable bundles and other TV packages, and as a subscription streaming service directly to the consumer. It had 24.5 million global streaming subscribers at the end of March, up 47% from a year earlier.

“We are very excited by the board’s determination to finally separate Starz from the studio business and crystallize the value,” RBC Capital Markets analyst Kutgun Maral wrote on Friday, however note what valuations LGF seeks for the property, There’s limited visibility on it.” “If Starz can be monetized at a valuation much higher than the value implied in today’s shares (eg ~$1.7bn) … then the shares are clearly undervalued.”

The most recent acquisition in the industry was‘s
(AMZN) an $8.5 billion deal for MGM and its library of more than 4,000 movies and 17,000 TV episodes. That transaction valued MGM at approximately 28 times 2020 adjusted earnings before interest, tax, depreciation, and amortization, or EBITDA, of the $307 million-financials last available year prior to the Amazon acquisition offer.

(NFLX) forward price-to-earnings ratio has declined from more than 62x at the end of last year to nearly 17x today, placing it just below the S&P 500 average. Lions Gate’s stock is trading at less than 14x today, from nearly 23x six months ago.

Lions Gate’s media network segment, which includes the Starz streaming service as well as cable networks, had $155 million in adjusted operating income before depreciation and amortization in the fiscal year ended March, up from $290 million in the previous fiscal year. was less. For the current 2023 fiscal year, analyst consensus calls for $211 in adjusted OIBDA, management’s preferred profitability measure.

Using that projected fiscal 2023 profit and Netflix’s current multiplier would yield an enterprise value of some $3.6 billion for Starz, versus Lions Gate’s current enterprise value of about $4.3 billion. But there is a lot of room for that shape to move. The company bought Starz in 2016 for $4.4 billion.

Lions Gate management said they were planning to announce a spinoff plan by the end of the summer, for a transaction that could close by the end of next March. In other words, a lot of work remains to be done.

Until there’s more clarity on the valuation of an offer or deal on the table, don’t expect to see a lot of gains in Lions Gate stock.

Write to Nicholas Jasinski at [email protected]

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