Why Buying STX Could Be Essential for Lionsgate’s Future

Why Buying STX Could Be Essential Lionsgate’s Future
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Once upon a time, Lionsgate had a great 2019. Boosted by substantial grosses from “John Wick 3” and “Knives Out,” the studio’s ticket sales had nearly doubled from 2018, putting it well ahead of not just MGM but Paramount for fifth place in share of domestic ticket sales.

But like everyone else, Lionsgate has had to lean on its other businesses amid the pandemic while charting its course for the future. That’s meant exploring its preexisting desire to sell Starz and a newer interest in acquiring some or all of STX Entertainment.

To understand the interest in STX, it must be viewed through the lens of Lionsgate’s bigger aspiration to keep Starz a venerable brand that can sell high. In Lionsgate’s Q4 2021 earnings call Thursday, CEO Jon Feltheimer named Starz front-and-center in his strategy summary, citing a plan to continue “[executing] a focused content approach” as the company supplies shows to the broader market of buyers.

Feltheimer didn’t reference STX, and he addressed the film portion of his strategic outlook last. But that doesn’t mean beefing up film won’t be integral if a post-Starz future is looming.

Though an anchor for Lionsgate throughout the pandemic, revenue brought in by the media networks segment that consists of Starz’s domestic cable and global streaming operations hasn’t changed much over the last three years.

Throughout 2021, Lionsgate’s television productions like CBS hit “Ghosts” and multiple spinoff series of “Power” on Starz are what’s helped the most to lift overall revenue, with fourth-quarter earnings showing a 92% year-over-year increase in revenue for the segment, comprising just under half of the company’s full $885 million haul before intersegment revenue is accounted for.

That doesn’t mean Starz in and of itself isn’t a success story.

After a shift in its carriage deal with Comcast at the end of 2019 switched Starz from belonging to a premium bundle alongside HBO and Showtime to an add-on service, a significant drop in cable subscribers occurred amid the wider specter of cord-cutting, but Starz has since added a tremendous number of global streaming subs that has brought total subs past 31 million.

It’s impressive but also increasingly difficult to sustain.

Starz is still technically profitable, but the last two quarters saw steep year-over-year declines. Licensing content for streaming services remains a pricey battle in a market inundated with buyers. While Lionsgate’s own series fuel Starz, the challenge of filming amid a pandemic is also at play, with the latest season of cult hit “Outlander” finally set to air after an 11-month shooting delay.

Plus, a new Pay-1 output deal bringing Lionsgate films to Starz went into effect this year, with new films from subsidiary Summit also set to hit Starz at the start of 2023.

This certainly adds further value to Starz, which VIP+ previously surmised could sell for a similar amount as the $8.5 billion Amazon is paying for MGM, a big return on the $4.4 billion Lionsgate paid for Starz in 2016.

But if Starz doesn’t sell, that leaves Lionsgate footing the expense for keeping streaming rights of its films in-house vs. what it could bring in from licensing those films elsewhere. After Sony ended its film output deal with Starz in 2021, it set new deals with Netflix and Disney that are expected to bring in about $3 billion over the next five years.

Given how much theatrical revenue continues to suffer, a significant increase in film licensing would be crucial for Lionsgate — which is why expanding its film library with STX makes a lot of sense.

After launching in 2014, STX merged with Indian media studio Eros International in 2020 after STX’s 2018 attempt to go public on the Hong Kong Stock Exchange never materialized.

The newly dubbed ErosSTX Global has since wanted to sell the STX film library, with prospective buyer The Najafi Companies reportedly willing to shell out $173 million for it as a February deadline for STX to pay off a $148 million debt load to creditors looms. Set in December 2021, Najafi’s proposal included a 45-day go-shop deal, which Lionsgate was reportedly hoping to take advantage of at the end of January.

STX has barely gotten back into the theatrical game with muted releases for “The Mauritanian” and “National Champions” in 2021 as “Queenpins” hit Paramount+ instead.

But STX also enjoyed a decent 2019 alongside Lionsgate, with Kevin Hart and Bryan Cranston-led “The Upside” and Jennifer Lopez crime-dramedy “Hustlers” both grossing more than $100 million domestically, a first for STX since “Bad Moms” in 2016.

With MGM on the verge of being controlled by a streaming-oriented entity like Amazon, Lionsgate clearly recognizes the opportunity in offering a bid for a studio that was on the verge of rivaling Lionsgate at the box office. Furthermore, STX did achieve profitability on five films released over ErosSTX’s last fiscal year via streaming and VOD sales, per the company’s last reported earnings.

Lionsgate already understands the value of operating as a seller in the streaming age, having sold “Knives Out” sequels to Netflix for a combined $450 million.

But its current biggest film franchise, “John Wick,” has seen its upcoming fourth film delayed to 2023 after prior calendar shifts. Until then, films like disaster pic “Moonfall” aren’t expected to take in much from the box office, making it imperative for Lionsgate to continue selling on all fronts.

If it can invest money from a hopeful Starz sale back into film and TV while adding to its existing library via STX, Lionsgate can chart a course through the streaming age as one of the last remaining true sellers while other companies scramble to make their streaming operations viable as content spend mounts.