Lionsgate shares jumped 11% Friday after the long-time “mini-major” reported a Q2 profit after a losing Q1, with a big year-over-year revenue jump too. But what really caught investor ears was news the company will explore spinning off or otherwise separating out its premium video service Starz.
An SEC filing said Lionsgate’s board authorized management "to explore potential capital market alternatives for its media networks business (STARZ) including, but not limited to, a full or partial spin-off, split-off, issuance of a tracking stock or other transactions.”
It didn’t hurt that the streaming side of Starz reported an almost 8% jump in global subscribers, to 18 million. During Lionsgate’s Nov. 4 earnings call, Vice Chairman Michael Burns explained the company’s reasoning simply enough.
“Recent transaction multiples give us confidence that exploring alternate paths is prudent,” he said.
Prudent indeed. The big fish in entertainment are biting, as happened in last summer’s $8.5 billion Amazon deal for MGM (though regulators may still step in). Earlier in the year, AT&T gave up on its Hollywood dreams, spinning WarnerMedia into a pure-play entertainment venture (and yet another cycle of uncertainty and upheaval) in a $43 billion merger with Discovery.
Moonbug Entertainment, a four-year-old children's entertainment outlet started by former Maker Studios exec René Rechtman (YouTube monarch Cocomelon is one of its franchises) was just scooped up by a Blackstone-backed entertainment rollup headed by ex-Disney execs Kevin Mayer and Tom Staggs. The price, up to $3 billion, including potential earn-outs.
And Mayer and Staggs’ still-unnamed company previously made a splash in August buying Reese Witherspoon production company Hello Sunshine for a reported $900 million.
Could a Starz spinoff spark the same investor heat, especially given the amount of private equity sloshing around markets? Absolutely, though with some caveats.
It’s notable that Lionsgate has been in dealmaking mode for quite a while now, dangling its library of 17,000 films and TV shows for possible acquisition. Two years ago, it reportedly talked with CBS about selling Starz, though nothing came of it amid all the other courtroom and boardroom drama then swirling around what’s now ViacomCBS.
As for Starz’s next iteration, however, Lionsgate may opt for something well short of an outright sale. It’s clear company execs see ongoing benefit for the studio side to have a connected streaming outlet as an alternative alongside its continued “arms dealer” status licensing content to more than a dozen other companies.
“We believe that a number of the structures we’re considering would allow Lionsgate and Starz to preserve many of the operational benefits we’re currently achieving within a single corporate structure,” Burns said.
Company executives have said they still have lofty goals for the streaming and pay-TV unit, with a goal of 60 million subscribers within three years.
That seems … ambitious, but recent analyst reports indicate all the major streaming services are seeing big growth globally even as oversaturated North America increasingly becomes a zero-sum game. So, if a spinoff or similar deal injects new capital into Starz that fuels a broader global expansion and more programming, maybe more than tripling the subscriber base isn’t complete hyperbole.
Regardless, the company has driven growth so far with an approach notably different from most of the majors, who rely on what might be called four-quadrant content offerings designed to appeal to as many potential subscribers as possible.
By contrast, Starz has focused on two core audiences: women and Blacks, both substantial audiences often underserved by mainstream programming. Programming for each is led by a bell-cow franchise, Emmy-nominated bodice ripper Outlander and NAACP Image Award winner Power respectively.
Both shows are getting a bit long in the tooth, with six seasons each since 2014. Outlander creator Ronald D. Moore has been busy with projects for other services, notably Space Race alternate history For All Mankind, for Apple TV Plus.
The Power franchise, meanwhile, has been recharged with several spinoffs. Executive producer/actor/rapper Curtis “50 Cent” Jackson has been behind many of those projects, though he was raging over the weekend on social media about Starz after a brief, premature launch of an episode he directed of his newest show, BMF.
Regardless, Starz continues to roll out new programming designed to fill the needs of those core audiences, with edgier, more outsider content that might not get a chance on other networks.
The company has also been adept at moving content back and forth between premium and ad-supported outlets of many kinds, milking maximum dollars from its relatively smaller library.
The best example is Schitt’s Creek, which ran for years in relative anonymity on pay-TV channel Pop (which Lionsgate partly owns).
During its first few seasons, the quirky Canadian comedy typically attracted 50,000 to 100,000 viewers per episode. Then Lionsgate licensed older episodes to Netflix, where they found a new audience and leaped into the cultural zeitgeist.
Fueled by that huge new following, the show’s final season on cable attracted more than 1 million viewers per episode, and won a sheaf of Emmys, including Best Comedy Series. Now the show is hugely valuable in syndication, with six seasons available on Netflix and Amazon’s IMDb TV.
Lionsgate hopes to build another cross-platform sensation based on John Wick, the series of high-body-count action films starring Keanu Reeves. A prequel series, The Continental, has just begun shooting, with related projects on the way with streaming and pay-TV outlets in mind.
The company has also embraced some other tactics to stoke sustained audience interest, including the counter-intuitive decision to give some popular shows a rest from time to time, parking high-profile content on the shelf for short periods so it’s not always available to audiences.
That feeds a sense of scarcity in the era of the infinite shelf, boosting the long-term value of a franchise that might otherwise might be taken for granted.
Lionsgate bought Starz just five years ago, which is to say a generation or two ago in streaming terms. More recently, Starz got its own sleek new offices directly behind Lionsgate’s Santa Monica, Calif., headquarters. Presumably that’ll make it ever so slightly easier to carve out the media networks in some sort of transaction while keeping it close by in other respects.
In company statements this week, it said "while we continue to realize substantial synergies from bringing Lionsgate and Starz together, we also see the opportunity to potentially unlock significant shareholder value under a scenario where investors have the ability to value our studio assets and Starz separately.”
Could two companies be worth more than one? Again, maybe, especially in this dollar-drenched market for streaming assets.
Just possibly, in an era filled with mergers and growth at all costs, Lionsgate’s counter-programming approach could once again be just the right way to handle things. It certainly won’t hurt to give it a spin(off).
