The merger of Starz and Lionsgate is moving closer to completion now that Starz has set a new carriage pact with AT&T and Lionsgate has formally suspended its dividend in preparation for financing the $4.4 billion transaction.
Starz’s new deal with AT&T’s DirecTV and U-verse platforms is less lucrative that its previous pact with DirecTV — a sign that AT&T is wielding its clout as the nation’s largest MVPD. (AT&T acquired DirecTV last year.) Starz will see an annual revenue loss of about $46 million from its previous DirecTV carriage deal.
Wall Street analysts had been bracing for the possibility of AT&T imposing even tougher renewal terms on Starz, so the deal unveiled Thursday was viewed as positive news for Starz. The outcome of the AT&T renewal terms was so crucial to Starz’s long-term earnings prospects that the merger agreement included a clause giving Lionsgate an out if Starz couldn’t reach a reasonably favorable deal with AT&T.
According to a Securities and Exchange Commission filing, Lionsgate and Starz will lessen the immediate blow of the revenue loss with an agreement for Lionsgate to pay AT&T $16.67 million a year for the next three years in equity or cash. As part of that transaction, Lionsgate agreed to a new VOD, pay per view and electronic sell-through distribution agreement with AT&T.
Starz’s revenue loss is estimated by analysts at about 3.5% from the previous deal, or 15% if the annual Lionsgate payments are factored in.
Starz’s filing noted that if the merger is not completed, Lionsgate will not be on the hook for the payments and AT&T would have the option of renegotiating the carriage agreement.
News of the Starz-AT&T renewal came on the same day that Lionsgate formally announced the suspension of dividend payments in order to conserve cash in anticipation of closing the Starz deal.