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Here's What CEO Jon Feltheimer Thinks About Finding a Merger Deal for Lionsgate

By Anders Bylund - Jun 4, 2021 at 7:37AM

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Analysts are speculating that the mini-major movie studio might be destined for a splashy merger. Here's what the company's leaders think about that idea.

Content studio and media-streaming service provider Lionsgate (LGF-A -1.33%) (LGF-B -1.31%) crushed Wall Street's expectations in last week's fourth-quarter earnings report. Breakeven earnings on $876 million of top-line sales stumped the analyst consensus of a $0.31 loss per share and revenue of $809 million. That report wasn't delivered in a vacuum. The entertainment industry is buzzing with excitement over potential mergers and acquisitions after a splashy content-focused buyout by (AMZN 0.84%) and an unexpected spinoff-merger of AT&T's (T 0.78%) Warner Media division.

Some analysts see Lionsgate as a likely next target for buyout offers. The rock-solid fourth-quarter report seems to support that idea. The combination of buyout speculation and strong business results has driven stock prices sharply higher. Altogether, Lionsgate's shares have gained more than 35% over the last month. Fortunately, Lionsgate CEO Jon Feltheimer took some time in the earnings call to discuss how he feels about potential merger ideas. Let's have a look.

No distractions, please

First, Feltheimer said that the Warner and Amazon deals underscored the value of high-quality content and intellectual property. He is not actively looking for a merger-based exit strategy, just focusing on the current business plan. That's how Feltheimer is building long-term value for his shareholders. He feels that Lionsgate can execute its existing growth plans without the financial assistance that a well-heeled buyer would bring.

"The thing that we don't want to get distracted by frankly is this concept of scale," he said. "We think our job is actually just to create outsized value for our shareholders."

A young couple eating popcorn and looking shocked at the TV screen.

Image source: Getty Images.

Streaming growth

The company is creating its own economies of scale. Subscribers to the streaming version of premium cable channel STARZ increased by 69% year over year, landing at 16.7 million names. STARZ now has more streaming subscribers than traditional cable TV accounts. Feltheimer had been aiming for 50 million to 60 million global subscribers by the end of the fiscal year 2025, but the business is actually tracking toward the top of that guidance range.

This proven success gives Feltheimer serious leverage when potential buyers come knocking on the door. This situation does a couple of things.

  • Lionsgate should be able to land a generous buyout premium if that's the final outcome. Spinning out STARZ as a separate business would also be a highly profitable idea in the current market. Shareholders would pocket substantial gains if Lionsgate signs some sort of merger or asset sale.
  • At the same time, the higher asking price may keep buyers away. Feltheimer may set his asking price too high for even the wealthiest media buyers out there if he wants to ensure that Lionsgate remains a stand-alone company.

What this means for investors

The CEO's long-term ambition certainly points to a huge price tag. He sees value-building synergies stemming from the combination of a high-quality content production house and a successful media service with a global reach.

"We want to be the market leader in premium and that's how we'll build our value," Feltheimer said. He continued: 

We talked to everyone, we listened to everything. But our main job right now is to create outsized value and the way we're going to do is by keeping our head down, having all of our businesses talk to each other 10 times a day, which is what they do. One plus one plus one is way more than three.

So if Lionsgate ends up making a deal, it should be a generous one. In my eyes, the company is more likely to stay separate for the time being. That might change if the streaming industry continues to consolidate, but I don't expect Feltheimer to actively search for buyers during the next couple of years.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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