The Acquisition Of Starz Should Help Lions Gate Diversify

Rumors of Lions Gate Entertainment Corp. (USA) (NYSE: LGF) making an offer for Starz (NASDAQ: STRZA) were first released to Benzinga on June 23. On Thursday, June 30, Lions Gate confirmed those rumors, announcing a plan to buy Starz for $4.4 billion.

B Riley's Take

B Riley's Eric Wold viewed the move to acquire Starz "as an additional positive step in the direction of diversification and visibility (especially given recurring revenue from the 56MM subscribers that STRZA has through its STARZ and STARZ ENCORE channels)."

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

Investor Pullback Unwarranted

Wold noted the 3.4-percent decline in Lions Gate indicated investor concerns around the projected 5.0–5.5x leveraged post-closed, but thought they were unwarranted. "We are confident in the combined entity's ability to reduce that by 1.5x in the first 12-months given the improving underlying profitability of the standalone LGF coupled with the visible recurring revenue associated with Star's subscribers," said the analyst.

Finally, Wold thought the acquisition plan would diversify the company's business model, pushing the Lions Gate toward more visible recurring revenue streams and lessen investor concerns "around the move towards skinny bundles."

The analyst maintains his $30.00 price target and Buy rating on Lions Gate Entertainment, noting he wouldn't change his estimates until the deal was finalized.

At the time of writing, Lions Gate traded at $19.49, down 3.66 percent Friday.