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EPIX deal seen as good value for sellers Viacom and Lions Gate

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EPIX deal seen as good value for sellers Viacom and Lions Gate

Metro-Goldwyn-Mayer Inc. will spend $1 billion to secure full ownership of the premium cable network EPIX / EPIX Drive-In (US), and analysts seem to favor the sellers, Viacom Inc. and Lions Gate Entertainment Corp., over the buyer in the deal, at least in the near term.

Before the transaction, MGM owns a 19.0% stake in the network and its affiliate networks, Viacom owns a 49.8% stake, and Lions Gate owns a 31.2% stake. The deal values EPIX, including its four premium pay TV networks, at about $1.28 billion, a sturdy payout for the sellers, Evercore ISI analyst Vijay Jayant said in an April 5 note.

"All said, we believe Viacom management viewed EPIX as a noncore asset, and the transaction value represents an attractive consideration for VIAB and LGF shareholders," the analyst said in the note.

It is difficult to nail down the specific calendar-year financials for EPIX as only Lions Gate reports the network's earnings and that company has a fiscal calendar ending in May. That said, SNL Kagan's estimates put EPIX 2016 net operating revenue at $556.0 million, and it expects EPIX to grow to $593.8 million in 2017. In its most recent annual SEC filing, Lions Gate called EPIX "the fastest growing premium network in 2015."

However, while revenue might be trending upward, the network's investments in original content could start weighing on the bottom line. Jayant noted that EPIX EBIT profits have been growing at 18% on average for the past four years, but "given the company's recent foray into original programming, we estimate 2017 EBITDA will meaningfully decline relative to historical levels." SNL Kagan projects programming expenses to climb from $289.9 million in 2016 to $307.9 million in 2017.

Perhaps an advantage of owning EPIX is the network already has distribution deals with most of the top pay-TV providers and has pushed its content onto digital platforms through its own authenticated streaming apps. The network has been expanding its original programming slate through collaboration with its three partner studios.

Moody's Ratings put MGM on notice after the deal, changing the outlook for the company from "stable" to "under review for downgrade." "The purchase is expected to be funded with new debt. The review will focus on the potential for a substantial increase in debt, which would cause leverage to meaningfully increase from its current very low level," the agency said in a note. However, Moody's points out that the acquisition does create some opportunities for MGM, giving it greater scale, diversification and footprint in the pay TV space.

In separate notes, the rating agency said the deal was "credit positive" for Viacom and Lions Gate, but it stopped short of changing ratings for those companies. For Lions Gate, the deal comes after the company acquired Starz for $4.4 billion, and Moody's was enthusiastic that the EPIX transaction will help reduce leverage at the company.

Viacom will also benefit from reducing its debt ratio, Moody's said. After a tumultuous 2016 for Viacom and its leadership, the media company is tightening its focus to six flagship brands, streamlining operations and reducing overhead. The company recently had a setback as a $1 billion funding deal with Chinese investors for its theatrical film business, Paramount Pictures, fell through. Senior SNL Kagan analyst Derek Baine pointed out in a recent report that Viacom is likely looking to the EPIX deal to make up for some of that lost cash.