Why Lionsgate’s Studio Is Splitting Up With Starz: CEO Pitches the Plan to Investors

Etan Vlessing
·5 min read
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Lionsgate CEO Jon Feltheimer says spinning off his Hollywood film and TV studio business from Starz via a Special Purpose Acquisition Company (SPAC) deal offers the best flexibility available before completing a planned and long-awaited full separation.

“We believe this transaction sets a valuation for the studio and increases our strategic optionality as we move toward separation,” Feltheimer told financial analysts during an after-market call on Thursday. His comments to investors follow Lionsgate unveiling plans last month to back into a SPAC to create a separately traded public company with a $4.6 billion enterprise value.

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Feltheimer told analysts the SPAC deal was the best way to uncover hidden shareholder value for the studio and Starz assets after the Hollywood studio considered strategic alternatives. “We had a number of options available for executing this step in our overall strategic plan.  We believe that we selected the best option for aligning with our goal of a full separation, raising capital efficiently with substantial proceeds available to delever, and establishing an appropriate valuation for our studio supported by blue chip investors,” he argued.

The proposed SPAC-style transaction, expected to close this spring, follows nearly two years of strategic talks by Lionsgate to spin off its studio division or Starz streaming platform. Feltheimer said his company struck a “fair price” with the SPAC transaction for the studios business, without having to take longer in the market to do a bigger capital raise or secure a higher valuation by structuring the deal differently.

“I’d say we found a price that we thought was reasonable for raising equity, but doesn’t ultimately of course represent the full value of how we consider the studio. But we’re always happy when investors old and new come in and can make money with this,” Feltheimer told analysts.

The studio business, comprising Lionsgate’s TV production and Motion Picture Group divisions and a 20,000-title film and TV library, will be combined with Screaming Eagle Acquisition Corp., a special-purpose acquisition rights company — often referred to as a blank check company — led by SPAC sponsor Eagle Equity Partners and CEO Eli Baker.

The newly merged entity, Lionsgate Studios Corp., will be a publicly traded vehicle able to raise fresh capital and merge with existing businesses. Its biggest asset will arguably be its vast library of movies and television franchises. Rosenblatt Securities put a $5.2 billion value on Lionsgate’s library in May, meaning it’s worth more than how the whole studio is currently valued.

Feltheimer said the SPAC transaction was structured more like a subsidiary-IPO, but with some advantages like the parent company eventually retaining 87.3 percent of the shares in Lionsgate Studios, while Screaming Eagle Acquisition Corp. will control the remaining 12.7 percent equity stake. Lionsgate vice chairman Michael Burns added on the analyst call that selling the minority stake in the studios business “establishes the initial studio value and gets us poised for full separation.”

Lionsgate also has the certainty of raising $350 million in gross proceeds to pay down debt, and nabbing $175 million in equity already to be committed by key investors.

Feltheimer insisted separating the studio with a single class of shares better allowed investors to see the value of a rare pure play entertainment studio in Hollywood. He also argued Lionsgate Studios would continue to have an “ongoing working relationship with Starz, which remains a wholly owned subsidiary of parent company Lionsgate. Starz will have the ability to strengthen its position as a profitable, premium SVOD platform with a domestic content strategy focused on valuable core demos, a largely digital subscriber base and a continued reliable supply of content from the Lionsgate Television and Motion Picture Groups.”

The media networks business, which mostly comprises Starz and its 28 million global subscribers, would remain in the existing publicly traded company. The Hunger Games and John Wick studio is betting that creating two stand-alone companies by launching a new public company out of a current public company can help value the Starz and studio assets separately and more generously than the current consolidated valuation.

“It (Starz) will be a great standalone channel. It will probably bulk up if we were to separate the business. Could we sell it? Again, we retain full optionality. So one way or the other, someone is going to take advantage of the value that they’ve created at Starz,” Feltheimer argued.

Burns added Lionsgate Studios would continue to have a strong relationship with Starz, while also being able to sell film and TV content to the highest bidder in the market.

“Our content creation strategy is 100 percent focused on driving the highest returns on each item of content, rather than serving as a funnel for our own streaming or television platform. This ensures we maximize returns on all of our spend, while a number of our peers are primarily using their studio business as a conduit to try to prop up their DTC (direct-to-consumer) streaming businesses,” Burns told analysts during a Q&A session on the call.

Burns also talked up the importance of Lionsgate’s growing content library in driving future profitability. “The guiding principle and bedrock of the studio is to create high quality content that can be added to our library for long term monetization. It’s the gift that keeps on giving, while consumer tastes continue to shift,” he argued.

The Lionsgate library only grew with the recent acquisition of certain Entertainment One film and TV assets from Hasbro. “We’re well along in the integration process and have seen no surprises except good ones so far,” Feltheimer told investors as eOne’s film business will be folded into Lionsgate’s Motion Picture Group and the studio continues to produce and deliver scripted and unscripted TV series to bolster the Lionsgate Television division.

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