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Content demand could make Lions Gate prime M&A target

With high-profile content assets getting scooped up in cross-industry megamergers, studio owner Lions Gate Entertainment Corp. may be the next in play.

Speaking at a recent investor conference, Lions Gate Vice Chairman Michael Burns acknowledged that when it comes to consolidation, "we're predator until we're prey." Further, when asked if he was surprised that tech companies have not been more active in media M&A, Burns said "the convergence [is] going a little slower than I would have thought, but that could accelerate quickly."

Considering that its market capitalization is about $5 billion, a deal to purchase Lions Gate would not come close to other major content acquisitions in recent months, such as AT&T Inc.'s $78.81 billion bid for Time Warner Inc., which included its Warner Bros. studio, or Walt Disney Co.'s $71.10 billion pending transaction with 21st Century Fox Inc. However, that could make the smaller outfit a desirable addition to a larger company looking to add studio assets.

Lions Gate's market cap has dropped over 30% year-to-date as the company has attempted to trim its film slate to focus on lower-risk, less expensive titles rather than attempting to swing big with blockbusters.

"It can be a tough business, and it's hit-driven," CFO James Barge said about the film business at a recent investor conference. "But the thing is, is we're going to continue our de-risk approach ... you're not going to see us taking outsized swings."

The company's June earnings revealed a net loss of $11.4 million, down from net income of $174.5 million in the prior-year quarter. Lions Gate revenue also slipped to $932.7 million from $1.01 billion a year prior, driven by a drop of over $100 million in its motion pictures segment. However, its television production and media networks segments showed gains of over $10 million each for the period, partly due to subscription gains at its Starz digital network.

During the investor conference, Barge reiterated that the company's 2019 fiscal year will continue to be soft compared to the prior year, adding that 2020 may be the next year of material recovery. Lions Gate's film studio brought in $1.80 billion at the box office in calendar year 2017 on the back of successful titles like "Wonder" and "John Wick: Chapter 2," according to data from Kagan, a media research group within S&P Global Market Intelligence.

As Lions Gate now is trading at a relatively low market price, it could be an attractive company for the right buyer. The speculation recently hit fever pitch when Bloomberg reported that one of the company's largest investors believed a recent distribution deal between Lions Gate's Starz / Starz Encore (US) network and Amazon.com Inc. could signal a broadening relationship between the two companies that may end in an M&A transaction. Lions Gate shares shot up following the report.

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Amazon has invested significantly in the media and telecommunications space to support its video ambitions, including technology companies like Atomic Moguls Inc. and Twilio Inc. and entertainment companies like Cheddar Inc., but Amazon has yet to invest heavily in a traditional content studio like Lions Gate.

Amazon may not be the only bidder in a Lions Gate auction, however. The speculation also comes at a time when Silicon Valley companies, such as Netflix Inc., Apple Inc. and Facebook Inc., are investing heavily in content, and as telecommunications companies like AT&T and Verizon Communications Inc. are actively organizing their content strategies.

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