No New EPIX Deal For Netflix, Will Hulu Step In?

• Lions Gate Entertainment Corp. (USA) LGF shares are up 16 percent year-to-date, despite having lost 5 percent over the past one month.
• B. Riley’s Craig A. Ellis maintained a Buy rating on the company, with a price target of $45.
• Ellis said that a ramp in other opportunities could more than offset the impact of the loss of the Netflix contract.

Netflix, Inc. NFLX has said on its blog that it does not intend to renew its 5-year agreement with EPIX for access to its movies. The agreement is scheduled to expire in September. Lions Gate has a 31.2 percent stake in EPIX, and the net income generated by EPIX constitutes 23 percent of the company’s total pre-tax income in FY15.

The original agreement signed with Netflix in late 2010 became non-exclusive in 2012 when EPIX signed an agreement with Amazon Prime.

Analyst Craig Ellis commented, “While the non-renewal by Netflix should not come as a surprise, in our opinion – given that it was signed at a time when Netflix was struggling to add exclusive content and drive subscriber growth and Netflix has recently shifted to a focus on original programming – we would not be surprised if the news caused some investors to become concerned about forward projections or other sell-side analysts to adjust projections.”

B. Riley’s estimates for FY16 and FY17 already reflected the risk of loss of this agreement, “with projections of flat contributions from LGF’s equity interests in EPIX and other companies even though those contributions increased by 100%+ in FY15.”

Ellis added that, with continued growth in other streaming services looking for content, there could be a ramp in opportunities that may more than offset the loss of “any potentially lower-priced renewal to come from Netflix.”

Media reports noted that Hulu was likely to sign a new non-exclusive agreement with EPIX for access to its content. “We would use any potential weakness in LGF shares to add to positions as we head into the peak theatrical release season of Q3/Q4 for the studio with the Malone/Liberty Media wildcard opportunities still hanging out there,” Ellis wrote.