Several months ago, the greatest media investor of our time, John Malone, obtained a 3.4% ownership stake in Lions Gate Entertainment (LGF). If you know anything about John Malone, then you know that he rarely makes a minority investment that remains a minority investment. It happens, but rarely without accumulating more along the way.
So as soon as I heard that Malone took a stake in the company, I bought LGF stock. I have no doubt that he will buy more of it, and possibly even buy the whole darn thing down the line.
There’s also the chance for LGF to become part of an even bigger deal involving AMC Networks (AMCX) and Starz (STRZA). Starz is a spinoff of Liberty Media (LMCA), with independent board of directors. Mind you, Starz isn’t going to be able to shut Malone out of discussions.
So let’s look at why investors should expect some kind of deal among these contenders — particularly some kind of deal between AMCX and STRZA.
The Strength of Starz
STRZA used to be just a pay-TV provider with lots of channels, almost exclusively showing movies from major studios. Then management figured out that it should produce original programming and hired the acclaimed former programming chief of HBO, Chris Albrecht, to take the top job.
Now Starz produces lots of original programming, which is basically a requirement in the new world of content because it justifies the monthly fees cable subscribers pay for it. As a result, Starz now has more subscribers than Showtime. So it comes to the table with a big subscription base, original programming, studio content deals, and a brand that’s building.
Apparently, there were suitors for the company last year, but the valuation got people tied in knots. The enterprise value of $4 billion couldn’t get a buyer interested. Now it’s $5 billion, so perhaps that changes their tune. On a price-to-earnings basis, STRZA stock trades at 14x earnings.
STRZA is in good shape financially, with $325 million in cash and receivables and $1.2 billion in debt at about 4% interest. The company generates decent, if not exactly spectacular, free cash flow … however, that cash flow has been declining recently.
AMC Also Attractive
AMCX has a different model. As a basic cable programmer, and owner of IFC, SundanceTV, WE TV and 50% of BBC America, it has a strong group of niche audiences. Led by programming genius Charlie Collier, AMC has produced some huge hits, and continually aims to push the boundaries of TV.
Earnings are erratic at AMCX because of the ebb and flow of original content, but right now it is valued at $5.3 billion, or 16x trailing earnings. Free cash flow here is much more robust, at $330 million in the TTM, with $241 million of cash on hand, and $2.5 billion in debt paying interest at about 5%.
Bottom Line: There’s a good fit here as far as combining basic and pay cable from a content standpoint. Also, it would give the combined entity more leverage as far as carriage fees are concerned. With all their current strength and potential synergies, why wouldn’t these companies attempt to combine?
If you have to choose between one or the other, it’s a toss-up. I think STRZA has more long-term value at the moment, but only because if an AMCX merger doesn’t happen, a merger with LGF will.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he was long LGF. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
