![]() Even the wild success of Hogwarts Legacy contrasted with the flopping of The Flash could be hinting that viewers are seeking new and different kinds of entertainment. For example, the contrast between the increasing box office bombs and the booming viewership of videos on YouTube and social media is an example of that. I do not have statistical evidence to support this yet, it is merely an anecdotal observation. There seems to be a shift in consumer taste that is taking customers time away from premium video and towards user-generated content. One key difference between both businesses however is that premium video is essentially under attack while the music business is proliferating. If the studio business succeeds in convincing investors it shares the dynamics of music publishers, then there will be a meaningful revision of the multiple. If that's the case, investors don't need to rush the buy the stock, as who knows what business conditions would be like if such a deal happens.Īs for the second path, note that Universal Music Group is priced at 22x cash flow, while the median average for the media sector according to Seeking Alpha is 7.75x. ![]() In separating the two businesses, it is possible that Lions Gate is just trying to make itself more appealing to future acquirers. ![]() Netflix reportedly wasn't interested in the cable networks and just wanted the studio. This separation could just be a precursor to selling the studio to a larger streaming company, similar to Netflix's rumored failed-acquisition of Paramount. The way I see it, there are two paths for Lions Gate studio: The Paramount path, and the Universal Music Group path. The first risk that jumps to my mind is a receivables-collection risk? if a sizeable chunk of the company's revenue comes from a former subsidiary that was deemed a drag on the studio's performance, how confident is management of collecting that pay giving the cable TV and streaming environment? More over, if the studio is such a strong business with valuable IP, why make a deal to keep the current arrangement in place rather than seek new, better one? Yet on the other side, they put in place a transition agreement that keeps the licensing fees from Starz coming. The rationale mentioned in the filing is that the separation will allow the studio to use the excess profits to produce new content and pursue sustainable growth. Firstly there are a lot of balls up in the air. Investors might think this is a sufficient of a signal an undervalued company is getting separated into two, one is more profitable than the other, meaning it will get a rerate higher, and the stock will reflect that. This is as clear a signaling as investors can get from management regarding which of the two is the better business (and as a result the better stock to hold long term). Without much analysis, the entire management team of Lions Gate moved to the studio. The Studio is Definitely the Better Business This makes sense, except I went through the separation document today and didn't see a clear path that shows the studio business would definitely be an appealing prospect for investments. The business relationship between Lions Gate's two subsidiaries masks a lot of the value the studio is generating, and a good way to show that strength and unlock this value for investors is to separate both companies. So just at a 10 times multiple, that's masking close to $0.5 billion of enterprise value. So anywhere from $36 million of intercompany eliminations in fiscal 2023 to the low point of the - low point of the guidance range of 2024, $750 million - $75 million. So currently, they're masking the strength of our stand-alone businesses. ![]() So I would remind you though that the intercompany eliminations, they're self-eliminating upon separation, and it's just math. I think the segregation of the assets is pretty straightforward in the context of this particular separation. Here's the company's CFO explaining the rationale: One answer to all that according to the company's management, is to separate the Starz business from the studio business. On the other hand, the streaming business is facing a truly difficult moment and the company's relative small size and high debt load is a significant risk. On the one hand, the company looks cheap at less than $2 billion in market cap compared to the library of good content it has, and the potential value it adds to an acquirer given the IP it owns. After persevering through some 300 pages of torturous legal speak, I still can't make up my mind on Lions Gate Entertainment Corporation.
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