Lions Gate Entertainment (LGF.A) shares are down 7% after missing fourth quarter estimates on the top and bottom line yesterday afternoon.
Fourth quarter revenue fell 12% while adjusted operating income before depreciation and amortization (OIBDA) fell 24% to $103.3 mln.
It was a disappointing year for Lions Gate without any big hits. Adjusted profit (OIBDA) fell 14% to $520 mln with revenue down 11% to $3.7 bln. Movie television production results are notoriously lumpy due to the timing of releases and associated costs.
The first quarter of fiscal 2020 is off to a strong start thanks to the strong performance of John Wick: Chapter 3 -- Parabellum. It was the first movie to supplant Disney's (DIS) record-breaking Avengers: Endgame as number one at the domestic box office last weekend.
The media networks segment grew the top line in the fourth quarter and fiscal 2019. The company's strategic focus is on Starz, its most valuable asset.
The premium cable channel ended the fourth quarter with 24.7 mln domestic subscribers, up 5% yr/yr. Meanwhile, the Starz over-the-top (OTT), direct-to-consumer (DTC) streaming offering grew 400,000 subs sequentially to over 4 mln.
On the call, management gave guidance for plans to expand its STARZPLAY international business. Management said the STARZPLAY streaming service will be available in 51 countries by July. The company is targeting 15-25 mln international subs by 2025. Losses will peak at $125-150 mln this year and the business is targeting profitability in 2023.
Excluding the losses from STARZPLAY, Lionsgate guided for $650-700 mln in adjusted OIBDA for fiscal 2020.
The company also said it will raise equity to fund the STARZPLAY expansion. Deleveraging its $3.0 bln in debt is also a priority.
Last week, CNBC reported that Lionsgate rejected a $5 bln offer for Starz from CBS (CBS). When asked about M&A speculation on the call, management said it had already laid out its strategic plans.
Lions Gate intends to go it alone, reduce debt, and purse its OTT strategy globally. Management seemed confident in its internal streaming ambitions and gave no indication that a sale of Starz was on the table.
Starz distribution allows the company to monetize its 17,000 title library of TV series and films. Selling Starz would leave a movie/television production studio that would lack scale and likely require another merger.
Lions Gate has long been speculated as an acquisition target. The media sector has grown increasingly competitive as technology companies enter the space, which led to a massive round of consolidation in recent years among legacy media companies. Scale is important and Lions Gate remains one of the smallest independent studios with a rich library of content.
With a $6.5 bln enterprise value including $3.0 bln in debt, the stock trades at ~10x EV/EBITDA estimates, which represents a modest premium to media peers excluding Disney. That media behemoth trades at a seemingly well-deserved premium of ~15x EV/EBITDA with its dominant position in the sector and a promising OTT strategy.