Not investment advice – Just educational and informational – Make your research before investing
Introduction to the Operation
This is a spin-off where the following are separated:
- Lionsgate Studios Corp
- Starz
The operation will be like this:
- For each common share of the holding company Lions Gate Entertainment Corp (LGF.B), you get 1 share of Lionsgate Studios Corp and 1 share of Starz.
- For each preferred share of the holding company (LGF.A), you get 1.12 shares of Lionsgate Studios Corp and 1 share of Starz.
In this case, one of the spin-offs, Lionsgate Studios Corp (ticker $LION), had already started trading on May 17, 2024. LGF owns 87% of the shares, and the rest are free-floating.
Company history
Usually, I start explaining which company is, but for this case, I thought it was interesting to talk about the operation first, before the company. This way, it’s clear from now on that when I mention Lionsgate Studios and Starz, I’m talking about two (eventual) separate companies.
Lions Gate Entertainment was officially formed in 1997. It includes very famous films and sagas like John Wick, Saw, Hunger Games, and many others. The company (like the rest of the industry) had problems in recent years because of protests by writers and actors in 2023.
Starz was bought in 2016 for 4.4 billion dollars. It provides premium digital content (series and movies) based on subscriptions. This is offered directly and through distributors, including OTT providers (like Amazon, Apple, etc.) and MVPDs (Comcast, Charter, DirecTV, etc.). As of March 31, 2024, it had 21.8 million active subscribers. It is mainly aimed at women.
Numbers of the Spin-Off
Obviously, since this is a media company (the same happens if you analyze Canal+, Vivendi’s spin-off), it has very high depreciation and amortization (D&A) expenses in the income statement, which strongly affects its accounting profit.
I don’t want to dive too deep into whether it’s a good company or not, or justify if it could be a good investment by analyzing how it generated Y amount of free cash flow over X years, and so on. Personally, this is a sector where I wouldn’t invest, for a simple reason: the high D&A costs tell you something there are big investments in capital expenditures (CAPEX) required. Maybe one year you have a blockbuster film that brings in a lot of cash, but other years you’re just burning money.
Of course, I’ll give a little overview of the holding company and its segments because I need to do this to test my theory that one of these spin-offs is potentially extremely undervalued (plus, there’s an additional situation that could happen, like a possible sale, but that’s speculating too much).
Let me clarify first that the prospectus for this spin-off is a mess it seems almost intentionally disorganized.
With all the disorganization, I decided to use LTM pro-forma data (Full Year March 31, 2024 + 9 months ending December 31, 2024 – 9 months ending December 31, 2023) so that it includes the eOne acquisition. It also fits pretty well with what the company has reported in previous years and what’s been discussed in meetings.
The valuation will be based on EV/EBITDA for simplicity. First, because of the high charges in depreciation, amortization, and impairments that this type of company has (and also because they decided to take some extra impairments to get rid of goodwill).
As we can see, we have an EV/EBITDA of 9x for Lionsgate Studios, which is very similar to what the company published as its current valuation in the December 2023 presentation. However, historically, M&A deals in this sector have happened at a much higher multiple.
Here we see first that, very likely, the spin-off of Starz will help improve the potential valuation of Lionsgate Studios.
And what about Starz? Why do we have so many unknowns? For the simple reason that the company isn’t trading yet. But we can still find a value with a simple subtraction. We take the share price of the holding company and subtract the current value of the Lionsgate Studios share ($LION), and that gives us the value the market would be assigning to Starz, right?
Well, if we consider that the holding company has two types of shares trading, $LGF.A and $LGF.B, with different conversion rates, let’s do the calculations.
For simplicity, we’ll start with $LGF.B, where the conversion ratio is 1:1.
We see that using the common shares ($LGF.B), we get a share price of $0.28 and a market cap of $70 million. This means an EV/EBITDA of 5x (I won’t get into whether that’s low or high yet).
Now, let’s use $LGF.A, where the conversion ratio is 1:1.12.
Negative price? Yes, obviously, if we assume a static price for $LION. But in theory, we are getting Starz share for free and with a decent safety margin to buy it cheaper than $LGF.B. Arbitrage traders, take note!! One way to ensure we really get the Starz share for free is to short $LION for the same amount at the same time. However, in IBKR, it shows as not shortable (and, in fact, it already has quite a bit of short interest).
I wrote about this opportunity on Sunday, March 30, 2025, when in the pre-market the preferred share ($LGF.A) was down 3.6. This opportunity has since disappeared, so the numbers mentioned earlier are no longer valid. But it remains as an exercise for anyone if this opportunity comes up again before the spin-off.
Now, is it better to start a position now or wait until the spin-off is official? We could use one part of the money to take advantage of the arbitrage now and another part to buy more shares in the days after, because:
- It’s a low-capitalization company, so many funds or indices that include the holding company’s stock will sell it off => selling pressure.
- It’s a bad company (yes) and not well-known, and the proof is the arbitrage gap in this well-announced spin-off, which makes me think most shareholders of the holding company will quickly get rid of these shares => selling pressure.
This last part might not happen, but I find it strange if it doesn’t, considering what I’ve said before.
Starz Valuation
As we know, Starz was bought in 2016 for 4.4 billion, which equals 10x EV/EBITDA. Since the company lost almost half its margin (but it should improve after the spin-off), valuing it at 6x to 8x EV/EBITDA seems reasonable to me. Even though it’s a bad company, it still has 20 million subscribers and steady income.
In other words, we have potential upside, and for me, it’s not too optimistic to think the company could have an EV of 1 billion to 1.2 billion, considering it was bought for 4.4 billion 9 years ago.
Additional Operations in the Spin-Off
I want to highlight some important news that might explain one of the reasons for this spin-off (besides improving Lionsgate’s valuation): it prepares the company to be sold.
Here’s a fact: we have the Liberty Strategic Capital fund, led by Steven T. Mnuchin, who was the Treasury Secretary during Donald Trump’s previous presidency. This is a big signal because the fund is likely either waiting for or planning to push for a sale, especially since the Trump administration is expected to be more friendly to these kinds of corporate deals.
Another activist fund that owns shares in Lionsgate has also been pushing for the company to be sold.
So, a possible sale of Lionsgate is on the table, and if it happens at an average valuation of 15x EV/EBITDA, it would be around 14 dollars per share.
Conclusion
This is a very interesting operation, the type that Joel Greenblatt talks about in his book.
I want to make clear that, at the time of writing this post, I don’t have any open positions in the company because the potential gain from buying shares at a negative price didn’t happen due to timing. I’ll keep tracking the company’s stock price and wait to see if another arbitrage opportunity comes up. If it does, I might buy coverage to lock in that price (by shorting $LION).
We can wait for Starz to start trading and expect a likely sell-off, then buy the shares at a bargain price and sell them as soon as they reach a price we think is reasonable. I don’t think it’s a good company to hold long-term.
Another option is to buy $LION shares (if we don’t own holding company shares) and wait for a very likely sale. The issue with this is how long it might take to find a potential buyer.
