How Lionsgate’s Spin-Off of Starz Will Unlock M&A Opportunities for Both | Analysis

Three and a half years after Lionsgate announced its plan to separate from Starz, the long-awaited move is finally facing a vote this week as the Hollywood studio looks to unlock more value for shareholders and find more strategic flexibility.

Shareholders of record will be entitled to vote at the meeting in Vancouver, and if the separation is approved by a majority, Starz will begin trading under the ticker symbol STRZ on the NASDAQ in May. The spin-off will bring to an end a combination that began nearly nine years ago when Lionsgate bought Starz in a $4.4 billion cash and stock deal.

For Lionsgate, a split will position it strictly as a content studio that can focus on monetizing its library. Meanwhile, Starz will have more autonomy to explore distribution and bundling opportunities that may conflict with Lionsgate’s broader priorities. It may also be able to move more nimbly to consolidate niche streaming players aimed at female and underrepresented audiences, Starz’s core demographics. But it also makes Lionsgate and Starz, which have long felt they were undervalued by Wall Street in their combined form, more attractive to potential buyers.

“It’s a defensive and offensive play at once,” Alex Lubyansky, managing partner of merger and acquisition law firm Acquisition Stars, told TheWrap, citing the potential for a break-up premium. “Together, they were discounted for complexity. Separated, they’re more digestible for strategic buyers or public markets.”

Despite Hollywood’s expectation that a wave of M&A and consolidation could be accelerated under the Trump administration, thus far it’s been mostly the opposite. Warner Bros. Discovery recently restructured to separately break out its linear TV and streaming businesses, setting the table for potential M&A down the line, and Comcast plans to spin off its cable network portfolio by the end of the year, which experts have previously told TheWrap could be used as a roll-up vehicle for other companies’ linear assets.

Lionsgate, which has been under the leadership of one of Hollywood’s longest serving CEOs, Jon Feltheimer, since 2000, has already made a move in this direction, launching the publicly-traded Lionsgate Studios via a SPAC deal with Screaming Eagle Acquisition Corp. in May of last year, which gave it an enterprise value of about $4.6 billion — $200 million more than what Lionsgate paid to acquire Starz in 2016.

“I believe larger media companies may go through a phase of deconsolidation to give investors the ability to invest in the specific profiles of certain businesses, rather than a conglomerate of media-related assets that has used IP as an organizing principle,” Marc DeBevoise, a veteran media and technology executive who previously worked at Starz, Paramount and NBCUniversal, said. “It may also be deconsolidation that leads to the reconsolidation of like-for-like businesses, like various cable networks coming together while separating from film studios, given the different investment return profiles of each of those businesses.”

In addition to the impending split, shareholders will also vote on collapsing Lionsgate’s dual class stock structure, as well as a 15-to-1 reverse stock split for Starz Entertainment, which would consolidate every 15 shares of common stock into one in order to reduce its total number of shares outstanding.

Once separated, Seaport Research analyst David Joyce believes both Starz and Lionsgate will be “willing to do the right deal,” regardless of whether that entails being a buyer or a seller.

“Starz has vocalized an interest in being a streaming roll-up vehicle. I would not expect full-company combinations, although that is possible,” Joyce added. “As for Lionsgate, my sense is that it would be a willing seller with the right deal. There are a lot of logical combinations that could emanate from industry rationalization.”

Representatives for Lionsgate and Starz declined to comment for this story.

The Lionsgate-Starz connection

For the nine-month period ending Dec. 31, Lionsgate’s studio business saw total revenue grow 93% to $2.13 billion, but profit fell nearly 19% to $268.5 million. Meanwhile, the media networks business, which includes Starz Networks and operations outside of the U.S. and Canada, saw profit drop 40% to $109.5 million and revenue tumble 14% to $1.04 billion. 

Though Starz and Lionsgate will be operating as two separate companies post-split, executives have publicly said both companies would continue to benefit from their collaboration with each other. 

Starz and Lionsgate recently extended a multi-year output deal through 2028 for the latter’s upcoming theatrical slate following the separation, which will continue to give the former exclusive rights in the first pay television and SVOD windows on an accelerated basis closer to the initial theatrical release. Starz will also have an exclusive second window and third window. The deal gives Starz expanded access to nearly 20 of Lionsgate’s theatrical titles a year, such as the third installment of “Now You See Me,” “The Hunger Games: Sunrise on the Reaping” and “Ballerina.” 

Additionally, Lionsgate Television will continue to have a close working relationship with Starz, producing premium TV series that are currently ongoing, such as the “Power” franchise and “BMF.” It will also have the option of licensing new series to Starz, similar to how it sells shows to other streaming platforms. Lionsgate’s recent TV projects include Apple TV+’s “The Studio,” Starz’s “Spartacus: House of Ashur,” USA’s “Rainmaker,” which has been shooting in Ireland, MGM+’s “Robin Hood,” which has been shooting in Serbia, and Netflix’s upcoming “Twilight” spinoff “Midnight Sun.” 

During a recent investor conference hosted by Morgan Stanley on March 4, Lionsgate Chief Financial Officer Jimmy Barge estimated that Lionsgate spends around $2 billion on content when including Starz, with nearly three quarters of that dedicated to the Lionsgate content.

Meanwhile, Starz CEO Jeff Hirsch said at a separate investor conference a day earlier that around $750 million is spent on programming aimed at its core demographics, which he said could come down roughly $100 million by adding more of its owned content. 

A Buyer or Seller

Starz’s Hirsch, who has repeatedly called the asset “misunderstood,” has emphasized the company is profitable, with 70% of its revenue coming from digital platforms. 

As of its latest quarter, Starz reported a total of 24.6 million subscribers globally. Of that total, 17.21 million subscribers were from streaming, while 7.36 million were from linear.  

Hirsch sees an opportunity to continue to scale up through bundle and distribution partnerships and to diversify its revenue by pushing into the ad-supported streaming space. The company recently forged distribution partnerships with Prime Video Channels, Vizio, YouTube TV, Roku and Hulu and bundle partnerships with Max and AMC+. 

“When people look at our valuation, if I look at the sum of the parts of our revenue, no one’s going to give me a Netflix multiple because of their size,” Hirsch said at the conference. “But I think everybody looks at us like AMC Networks, but we’re not. So the reality is, once we get out and really start to tell the story … people will start to see underneath the very durable revenue line for the last seven years.”

But experts argued that Starz is likely to struggle as a long-term standalone. “Without massive scale, it becomes either an acquisition target for a larger streaming player or a strategic partner in bundled offerings. It’s more probable to be bought than to buy,” Lubyansky said.

Qualia Legacy Advisors managing director Aaron Meyerson said it’s not hard to imagine Starz landing back in the sights of a Roku or Apollo Global Management, which previously expressed interest in a stake in the company but couldn’t agree on a valuation, according to The Wall Street Journal. Starz could also be an attractive partner for AMC Networks, A&E Networks or Comcast’s SpinCo, DeBevoise added.

Meanwhile, Meyerson said Lionsgate’s content library could be appealing to private equity or Sony as a bolt-on acquisition. Lubyansky added that Lionsgate could also be attractive to the other traditional legacy studios looking for IP or streaming platforms looking to boost their content offerings.

It’s a defensive and offensive play at once” – Alex Lubyansky, managing partner of merger and acquisition law firm Acquisition Stars

When it comes to getting a deal done, DeBevoise believes that Lionsgate and Starz would be less likely to face outsize scrutiny from the Trump administration. They’re “just not political enough, big enough or participating in a business like news where they might draw more attention from the administration to garner that negative attention,” he said. However, finding a similarly situated buyer would likely be a challenge, given the president’s scrutiny of legacy media players and big tech giants since returning to The White House.

If an outright sale isn’t immediately doable, Lionsgate could also shed non-core assets, such as minority stakes or joint ventures. Activist investor Anson Funds, which is a top five shareholder in Lionsgate Studios that supports the Starz split, has asked Lionsgate to consider a variety of strategic options, including a possible sale or divestitures of its unscripted television and 3 Arts businesses. However, an individual familiar with the matter tells TheWrap that both businesses are viewed as core assets. Last year, Lionsgate notably upped its majority stake in 3 Arts to 75%.

Additionally, Anson has called for Lionsgate to improve its financial disclosures and pursue alternative revenue streams, such as merchandising and events like Broadway shows. 

“We always welcome the ideas and input of our shareholders,” a Lionsgate spokesperson previously told TheWrap. Representatives for Anson Funds did not return TheWrap’s request for comment.  

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