Private Equity Bidding On Premium Channel Starz; A Strategic Buyer Would Be More Attractive

News broke on May 3 that private equity firm Apollo Global Management is teaming up with Roku to bid on a 20% stake in premium channel Starz, which is currently wholly-owned by Lionsgate. This would be a good fit for Apollo if it can leverage it up before interest rates increase again and milk the cash flow to pay down debt.

It might be a fit for Roku as well, which is trying to build a competing service to Netflix
NFLX
and other Over The Top (OTT) platforms. Roku has significantly expanded original programming (it announced last year it plans to develop more than 50 original shows) and one of them is “Zoey’s Extraordinary Christmas,” a spin-off of the TV show “Zoey’s Extraordinary Playlist” which is produced in partnership with Lionsgate and airs on NBC. The two companies are already close with Roku recently signing an output deal to air Lionsgate movies on the ad-supported service after their initial run on Starz.

A strategic bidder, specifically a major media conglomerate which owns multiple cable networks and TV stations would likely lead to a better outcome as it could use its leverage to force cable and satellite operators to carry the channel. The Board of Lionsgate authorized the management team in November of 2021 to look at either a full or partial spin-off of Starz.

However, selling just a 20% stake in the network wouldn’t seem to be the best way to monetize the asset. Rather a sale of 100% to a major media conglomerate would unlock the full value of the network.

The premium channel has suffered since Comcast
CCZ
Corp., the nation’s largest cable operator, in 2020 dropped it from its digital package and its subscribers can now only view it if they pay an additional $8.99 per month. Shares in publicly traded Lionsgate Entertainment are trading at a valuation significantly under the 2016 purchase price of Starz for $4.4 billion.

The core service, served up to cable and satellite operators, is under pressure as more and more subscribers flee these expensive platforms and go to cheaper online video services. Although Lionsgate touted in February that global streaming subs to Starz and STAR
AR
ZPLAY Arabia grew sequentially 44% for the last quarter of the year this good news was offset by the fact that international streaming is a small part of their business. In addition, Lionsgate is no longer the majority owner of STARZPLAY Arabia.

At the Media Networks division, Starz Networks revenue in its last fiscal year (ending 3/31/21) comprised 92.6% versus STARZPLAY International at just 4.2% and other streaming services at 3.2%. The division as a whole grew revenue 5.1% to $1.563 billion while segment profit fell 1.2% $290 million.

It’s still unclear whether the purchase will go through as the Apollo & Roku team have differing views on the value of the division than Lionsgate. Management at the company are likely to argue that the valuation should be a multiple of Starz Networks cash flow (which totaled $438 million last year), not consolidated cash flow (as STARZPLAY International generated a loss of $140 million on $66 million in revenue while other streaming services were slightly negative at -$9 million on $50.3 million in revenue.

It’s likely that there are a number of other parties kicking the tires that have not yet been leaked to the press. One report just placed DIRECTV as a potential buyer. However, its lack of any type of retransmission leverage due to it not owning major cable networks or TV stations puts it at a disadvantage to some buyer

s.