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Media analysts: CBS better off buying Lions Gate, not Starz

While CBS Corp. is reportedly eyeing a deal to buy premium network Starz, some media analysts believe the programmer would be better off purchasing all of the holdings of Starz parent Lions Gate Entertainment Corp.

Acquiring Starz would vault CBS' position in the premium network market and provide another in-house outlet for its rapidly growing TV production business. CBS reportedly offered $5 billion for Starz, while Lions Gate countered with $5.5 billion, according to Reuters. Lions Gate bought Starz for about $4.4 billion in 2016.

CBS has not commented on the reports about its interest in Starz. When asked about the M&A rumors on Lion's Gate's May 23 earnings call, CEO Jon Feltheimer declined to comment directly, instead emphasizing the company's international direct-to-consumer growth ambitions. Lions Gate is aiming for 15 million to 25 million international streaming customers by 2025.

"We always have to listen to opportunities to create ... shareholder value," Feltheimer said. "But again, we outlined today the plan [for Lions Gate's assets], and that's what we're going to execute on."

Amid continued speculation about the potential recombination of CBS and Viacom Inc., analysts said a reunited CBS-Viacom would benefit from the addition of Lions Gate. In addition to Starz, Lions Gate assets include a 17,000-title film and TV library, a global sales force and distribution structure and a TV production unit.

CBS and Viacom split in 2006. However, Shari Redstone, who controls both companies through majority shareholder National Amusements Inc., has long advocated for a reunion.

"It's reasonable to assume [a Viacom reunion] will happen and Lions Gate could add scale," said Moody's analyst Neil Begley in an interview.

Don Bilson, an analyst at Gordon Haskett Research, said combining Viacom's Paramount Pictures with Lions Gate's film business would offer clear synergies.

The media landscape has been reshaped by consolidation over the past year, with Walt Disney Co.'s acquisition of 21st Century Fox Inc. assets, AT&T Inc.'s purchase of Time Warner and Comcast Corp.'s Sky PLC takeover. The media conglomerates are all moving toward launching broad-scale streaming services.

One of the reasons Lions Gate purchased Starz in 2016 was to provide a more consistent generator of revenue and cash flow to its film and TV businesses. Lions Gate's media networks division, which primarily consists of Starz, generated $362 million in revenue over the three months ended March 31. That compares to $370.8 million in the quarter ended in March 2017, Starz' first period under the Lions Gate umbrella. However, Lions Gate's media network division has exceeded that initial revenue contribution only once since then, reporting $377.3 million in revenue for the quarter ended in September 2018.

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Turning to subscribers, U.S. premium network rival HBO has almost twice the base of Showtime and Starz. However, if CBS-owned Showtime and Starz were combined, CBS would likely vault past WarnerMedia as the largest operator of premium networks in the U.S.

"With a Showtime and Starz combination, CBS could really build out its premium and OTT platforms," said Gordon Haskett analyst Bilson. Starz' stand-alone OTT service has more than 4 million customers in the U.S.

Together, CBS Corp. streaming services CBS All Access and Showtime OTT have garnered more than 8 million paid subscribers, outpacing expectations. CBS now expects the services to count 25 million combined subscribers domestically by 2022, versus its previous projection of 22 million in that time frame. Internationally, CBS All Access has outposts in Canada and Australia and direct-to-consumer offerings are on tap for Latin America and Europe.

CBS also has invested in ad-supported video-on-demand products. News service CBSN launched five years ago, and the company rolled out three ad-supported vehicles in 2018: sports highlights and analysis service CBS SportsHQ; entertainment-oriented ET Live; and local news offering CBSN Local.

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Moody's Begley also pointed to the potential of Pluto TV, the Viacom-owned internet-based video unit, to combine with CBS or Lions Gate services, should the three entities ultimately merge. Viacom bought Pluto TV in March.

Still, Begley does not see the ultimate benefit in adding Starz to a potentially combined Viacom-CBS, as he believes it would expose CBS to more customers "churning in and out," creating subscriber volatility.

Should a Starz deal be announced, it would represent CBS' second deal with Lions Gate this year. CBS in March acquired the studio's 50% interest in basic cable channel POP (US), bolstering its basic cable roster.