Starz Acquisition Still Carries 'Significant Risks' For Lions Gate Entertainment

The acquisition combines Lions Gate's content production and library assets with Starz's premium cable distribution. In its regulatory filing, among others, Lions Gate projected that with the addition of Starz FY17 revenue would almost increase two-fold to $4.6 billion.

"We think the valuation of the Starz deal is fairly reasonable, though the acquisition still carries significant risks. These include regulatory hurdles (read tax inversion), the ability to achieve projected synergies, and questions about the future of the traditional cable channel package," analyst Joseph Bonner wrote in a note.

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In addition, Starz's affiliate distribution agreement with AT&T Inc. T /DirecTV is up for renewal. The AT&T/DTV agreement is reportedly worth $350 million per year to Starz. Starz has also lost its content output agreement with Walt Disney Co DIS as it has focused more on original content.

"Finally, questions remain about the viability of the traditional cable package given the increasing number and sophistication of digital content distribution platforms, particularly Netflix; increased cord-cutting or shaving by millennials; and subscriber losses by cable distributors," Bonner continued.

"While Starz is definitely a trade-up from EPIX, it is still a second- or third-tier premium cable channel and could be hurt by newer, slimmed-down cable channel packages," Bonner added.

Meanwhile, Lions Gate reported mixed results for the first quarter, with strong revenue growth but lagging profitability, mostly due to a difficult comp last year. The company continues to hint the sale of six to seven non-core assets over the next 12–24 months.

The analyst raised his FY17 EPS estimate to $0.77 from $0.69 and the FY18 forecast to $1.08 from $0.99.

At time of writing, shares of Lions Gate were up 0.89 percent at $21.61. The analyst has a price target of $34.

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