The long-awaited studio-separation deal from Santa Monica-based Lions Gate Entertainment will likely lure buyers for company assets, but this wasn’t enough to persuade the credit rating agency Fitch to boost Lions Gate’s creditworthiness.
The agency earlier this month cut Lions Gate’s long-term issuer default rating from “B” to “B-” despite notable equity proceeds raised from its $4.6 billion special purpose acquisition company studio deal.
The agency justified its downgrade by pointing to Lions Gate’s assumption of production loans last month when a separate acquisition of the entertainment platform eOne was finalized.
Lions Gate paid $375 million in cash for eOne, but the company said it expects approximately $350 million in proceeds from the new studio entity’s capital raise to enhance its balance sheet through this acquisition.
The rating action comes nearly a year after Fitch cut Lions Gate’s overall outlook to negative based on costly production loans for content produced but unreleased throughout the pandemic. This time, Fitch awarded the company an overall stable outlook as its catalogue increased in scale with eOne’s 6,500 titles and last year’s theatrical releases generated more than a $1 billion combined at the box office.
The Lionsgate Studio formation was announced as a special purpose acquisition company deal with the Hollywood-seasoned Screaming Eagle Acquisition Corp. Lions Gate plans to approve new publicly traded studio business this spring, delineating its valuable franchises like “The Hunger Games” and “John Wick” from the media business tethered to the streaming platform Starz.
According to Barton Crockett, an internet media analyst at the New York brokerage firm Rosenblatt Securities, the priority for Lions Gate now becomes shedding Starz, whose high overhead costs and slow subscriber growth has weighed down the company’s overall stock price.
“We see the value bar for Starz set so low that finding an exit path should be doable,” Crockett wrote in a memo to clients.
Lions Gate bought Starz for $4.4 billion in 2016, and in September the platform had 25 million subscribers globally. Despite the paying audience, Starz lags the scale achieved by competitors in the streaming war, such as Netflix, Disney and Warner Bros. Discovery.
“Tech conglomerates expanding into content such as Apple and Amazon would seem to be among the logical potential buyers of Lionsgate Studios,” Crockett wrote.
The SPAC spinoff was one of the largest media deals announced last year amid a global slowdown in mergers and acquisitions. The company pulled the trigger after hinting at the business separation for years and its second-quarter earnings beat analyst expectations due to outsized box office success driving substantial revenue. The company’s third-quarter earnings date for the 2024 fiscal year has yet to be announced.
