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What CBS’ Pursuit of Starz Means for CBS, Lionsgate

CBS’ effort to buy pay TV service Starz from Lionsgate seems on the surface to be a head scratcher.

CBS has told Wall Street for years that it has prospered because it brings only two must-have services to the table in negotiations with MVPDs, allowing the Eye to drive a hard bargain. Why would CBS want to take on a lower-profile rival to Showtime?

Meanwhile, Lionsgate has presented Starz, which it acquired in 2016 for $4.4 billion, as central to its strategy of diversification with a premium TV network that can serve as the launching pad for new programs from its TV studio. Why would Lionsgate want to sell now?

CBS’ pursuit of Starz comes after months of deliberations by the CBS board of directors on the best course for the Eye at a time when it is dwarfed in size and global scope by its longtime rivals, notably the M&A-enlarged conglomerates of Disney, Comcast and AT&T.

It’s no secret that the prospect of CBS reuniting with Viacom remains strong, given the stated preference of controlling CBS and Viacom shareholder Shari Redstone. The news of CBS’ hunt for Starz suggests that the CBS board of directors is actively looking at more than Viacom for M&A and strategic options.

CBS expressed its interest in Starz back in 2015 and 2016 when it was on the block. Lionsgate was long seen as the most likely buyer for Starz given the two companies’ common links to investor John Malone. In the years since, the dawn of the skinny bundle era has validated CBS’ strategy of focusing on fewer powerhouse channels, compared to Viacom’s raft of nearly two dozen basic cablers.

But Starz is a purely subscription business, something that appeals to CBS as it is less vulnerable to cyclical swings. The collection of 17 Starz- and Encore-branded channels has seen its subscriber base grow to about 25.1 million in the U.S., per Lionsgate’s most recent disclosure, in the past year, thanks largely to the company’s push in launching its standalone streaming app. Lionsgate has also been investing in a global rollout of Starz as a streaming option — something CBS is in the midst of ramping up for its CBS All Access service and Showtime.

Moreover, like Lionsgate, CBS sees Starz as another platform for launching original series that can be monetized through international licensing, or as the building blocks of future subscription offerings outside the U.S.

Lionsgate’s stock has been battered as the company suffered through a drought at the box office — which may end this weekend if “John Wick 3” performs as expected. The discussions over Starz began with an incoming call to Lionsgate from CBS, multiple sources said, and those conversations are continuing. That was welcome news for Lionsgate investors, judging by the nearly 15% jump Lionsgate shares took after the news was first reported Friday by the Information. Later in the day, Reuters reported that Lionsgate countered CBS’ $5 billion overture with $5.5 billion, which would mark a respectable premium over its purchase price three years ago.

Reps for CBS and Lionsgate declined comment.

CBS’ board of directors is scheduled to hold a regular board meeting on May 29, the day of the company’s annual meeting in New York. The consideration of M&A options is expected to be on the agenda. The moves on Starz suggest the board is looking hard at unexpected targets in addition to its former sibling under the Redstone empire. CBS already conducted a transaction in March to buy out Lionsgate’s stake in the Pop cabler that the companies have jointly owned since 2013.

If CBS succeeds in wooing Starz, Lionsgate will need to craft a new narrative for investors. Although the sale of Starz might suggest otherwise, the company is said to be prepared to use Starz proceeds to pour more resources into its content production operation amid the growing global demand for high-end series and movies.

(Pictured: Starz drama “Outlander”)

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