4 Reasons Bernstein Upgraded Lions Gate

Following a proprietary sample survey of Starz subscribers, Bernstein’s Todd Juenger upgraded the rating on Lions Gate Entertainment Corp. (USA) LGF from Market-Perform to Outperform, while raising the price target from $22 to $31.

Reasons For Upgrade

Lions Gate had been downgraded following the acquisition of Starz due to concerns surrounding the latter’s “vitality in an intensely and increasingly competitive premium network space,” analyst Juenger noted.

The sample survey of Starz revealed most subscribers actually valued the service highly. “Our hypothesis was that most Starz subs never asked for the service in the first place and wouldn't miss it if it were gone,” Juenger wrote. “The results [of the survey] give strong evidence our hypothesis was wrong.”

Upgrade Justification

The market had been concerned about the terminal value of Starz, but the analyst said there was “newfound confidence” regarding this.

The other three reasons were enumerated as:

1. Cash generation.
2. De-levering.
3. Upside options.

Following the transaction, Starz would contribute 73 percent the cash slows of the combined entity. “In order for LGF stock to work, Starz has to work,” Juenger said.

“Our approach assumes no breakout hit(s) for Starz, no movie blockbusters, no unexpected delevering events (e.g. EPIX). Those are all upside options. As is future M&A/takeout,” the analyst added.