Why This Entertainment Company Could Be An Acquisition Target For Streaming Giants Amazon, Apple Or Netflix

Lions Gate Entertainment Corporation LGF/A LGF/B is a film entertainment studio with a presence in motion pictures, television programming, home entertainment, and digitally delivered content. The company may become an attractive acquisition target, as its subsidiaries and in-house content typically releases more than 25 motion pictures theatrically each year. 

Why It Matters: While Lions Gates struggles to establish profitability, it excels in generating new content, as the company has a film and TV library of more than 17,000 titles, 90 TV shows across 40 different networks, with 59 major awards won.

“Since 2008, acquirers have been particularly targeting underperforming public firms, because underperforming public companies are more likely candidates for operational improvements and cost savings through merger synergies. Buyers also take advantage of public companies whose valuations have fallen the most during market downturns,” said Philip Whitchelo, Vice President of Strategy and Product Marketing at Intralinks.

Growth: According to Intralinks, between 1992 and 2014, target companies tended to have higher growth than non-target companies. Although Lions Gate revenues and net income have remained stagnant or declined over the past five years, the firm's box offices have grossed over $10 billion in the past five years. Additionally, in the first quarter of 2023, Lions Gate's global streaming subscribers grew 57% year-over-year to 26.3 million, accounting for a total global subscriber base of 37.3 million.

Profitability: Since 2008, public targets have been 3.3% less profitable than public non-targets, Intralinks reported. In the first quarter of fiscal 2023, the net loss attributable to Lions Gate shareholders was $119 million. While Netflix NFLX posted a gain attributable to shareholders of roughly $1.4 billion, as of June 30, 2022.

Leverage: Intralinks reported that public targets have had 11% less leverage than public non-targets since 2008. When evaluating the balance sheets for Lions Gate and Paramount Global PARA, it is evident that Lions Gate would have to issue more debt to increase its financial leverage to fall in line with its peers.

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Size: Next, public targets are 55% smaller than public non-targets, according to IntraLinks. Lions Gate's market capitalization is roughly $1.58 billion, while competitors such as Paramount have a market cap north of $12 billion.

Liquidity: Additionally, target companies have lower levels of liquidity than non-targets. Lions Gate has total current assets of $1.029 billion, as of the first quarter of fiscal 2023, while Paramount had total current assets of over $14 billion, as of June 30, 2022.

Valuation: Lastly, public companies in the bottom three deciles for valuation are on average 30% more likely to become acquisition targets,  Intralinks reports. After analyzing Lions Gate's valuation metrics and profitability ratios, the data shows investors are giving more value to the other likely takeover target, Paramount.

The Last Word: After analyzing six metrics that make a good acquisition target, it is evident that Lions Gate checks off most of the requirements. As streaming giants such as Amazon.com AMZN and Apple Inc. AAPL are competing for more subscribers and content, it may make sense for one of them to purchase Lions Gate in the future.