KeyBanc Does Not View Strategic Value Of Lions Gate/Starz Deal Favorably

KeyBanc Capital’s Evan Wingren believes Lions Gate Entertainment Corp. (USA) LGF acquiring Starz STRZA would not add enough scale “to open up significant new revenue opportunities or meaningfully alter the potential of either business.”

Wingren maintains an Overweight rating on Lions Gate Entertainment, while lowering the price target from $27 to $24.

Strategic Benefits Unclear

“Despite near-term financial benefits, we believe Starz is likely to see long-term margin compression due to its deteriorating competitive position,” the analyst mentioned.

Wingren also believes Lions Gate’s current output deals and Starz’s sale of several international rights for its originals are likely to limit new SVOD opportunities.

Related Link: Lions Gate Surrenders Huge Gains

In addition, any funneling of Lions Gate’s shows to Starz is expected to come at the expense of potential sales to other outlets, which in turn had the potential to prevent this strategy from driving incremental revenue or profits.

Financial Benefits

“We do not anticipate significant savings in production or programming expenses, so elimination of overhead is likely to provide the bulk of cost savings,” Moore went on to say, while adding, “Although full tax implications are unclear, Lionsgate's historical tax rate of ~15 percent should provide significant savings versus Starz's current rate of approximately 33 percent.”

The analyst pointed out that cost synergies of $100 million appeared to be achievable for the combined entity.