Lionsgate (LGF.A / LGF.B)

• The Bottom Line: Lionsgate is a classic “sum-of-the-parts” investment puzzle, a media company with two distinct businesses—a Hollywood studio and the STARZ streaming service—that may be worth more apart than they are together.
• Key Takeaways:
  • What it is: A “mini-major” film and television studio combined with a premium cable and streaming network (STARZ).
  • Why it matters: The company is in the process of separating these two businesses, creating a special situation where the market's confusion could unlock significant hidden value for patient, diligent investors. sum_of_the_parts_analysis.
  • How to use it: Investors analyze Lionsgate not as a single entity, but by valuing its studio and STARZ segments independently, then subtracting debt to find a potential intrinsic_value.

Imagine you own a unique property that's part-farm, part-tech startup. On one side, you have the farm (the Lionsgate Studio). It's a seasoned, well-run operation. Some years, the harvest is bountiful—you produce blockbuster crops like The Hunger Games or John Wick that bring in massive profits. Other years, you have a few duds, and revenue is less predictable. But over the decades, you've built up a massive silo full of valuable, time-tested seeds (a film and TV library with over 18,000 titles). This library is like a collection of classic apple tree seeds; you can license them out to other farmers (streaming services like Netflix, Amazon Prime) year after year for a steady, reliable income stream, regardless of the current year's harvest. On the other side of the property, you have the tech startup (STARZ). This is a subscription-based business. People pay you a monthly fee to access your exclusive content. It's a modern, recurring-revenue model. Instead of relying on one-off blockbuster sales, it aims for consistent, predictable cash flow from millions of subscribers. However, it's operating in a fiercely competitive neighborhood, with giants like Netflix, Disney+, and HBO Max living right next door. It needs to spend a lot on marketing and new technology to keep its customers. For years, Wall Street has looked at this combined farm/startup property and scratched its head. How do you value something so inconsistent? The volatile, hit-or-miss nature of the farm often overshadows the steady, subscription-based potential of the startup. The result is that the market has often valued the entire property for less than what the farm and the startup would be worth if they were sold separately. A value investor sees this confusion as an opportunity. Lionsgate's management has decided to split the property in two, separating the Studio from STARZ. This move is designed to let each business be valued on its own merits, potentially revealing the true, higher value that the market has overlooked.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” - Benjamin Graham

This quote perfectly captures the Lionsgate thesis. The “vote” has been negative due to complexity and perceived risk. The value investor is betting that once the businesses are separated, the “weight” of their individual assets and cash flows will be properly recognized.

Lionsgate is not a simple “buy and hold” stock like Coca-Cola. It's a more complex situation that appeals directly to the core tenets of value investing for several key reasons:

• Sum-of-the-Parts (SOTP) Analysis: This is the primary tool for analyzing Lionsgate. The company is a textbook example of a business where the whole appears to be worth less than the sum of its parts. A value investor can meticulously build a case by valuing the studio (based on its library and production capabilities) and STARZ (based on its subscribers and cash flow) separately. If this calculated combined value is significantly higher than the company's current stock market valuation, a substantial margin_of_safety may exist.
• Hidden Asset - The Content Library: While everyone focuses on the latest box office numbers, the true jewel of the Lionsgate studio is its massive content library. This is a durable, cash-generating asset that the market often undervalues. It's the “engine room” of the company, providing stable, high-margin licensing revenue that helps smooth out the volatility of the hit-driven movie business. For a value investor, who loves predictable cash flows from durable assets, this library is a critical part of the thesis.
• Special Situation Investing: The planned separation of the Studio and STARZ is a classic “special situation,” a corporate event that can unlock value independent of the broader market's movements. Value investors like Joel Greenblatt have built entire careers on finding and exploiting these situations (like spin-offs, mergers, or reorganizations). The spin-off forces the market to re-evaluate each business on its own terms, often correcting previous mispricing.
• Focus on Assets and Earnings Power, Not Narrative: The prevailing market narrative for media companies is often focused on the “streaming wars” and subscriber growth at any cost. This can lead to companies like Lionsgate, which doesn't fit neatly into the “streaming giant” box, being overlooked or misunderstood. A value investor cuts through the narrative to focus on the fundamental questions: What are the underlying assets worth? What is the sustainable, long-term earnings power of each segment? This detached, analytical approach is the essence of value investing.

Analyzing a company like Lionsgate is less about a single formula and more about a methodical process of deconstruction. It's akin to an appraiser valuing a complex estate.

Here is a simplified, step-by-step framework for conducting a sum-of-the-parts analysis on Lionsgate.

1. Step 1: Understand the Spin-Off Structure.

First, you must understand the details of the separation. Which company will retain the debt? What will the ownership structure look like post-spin? The fine print in company filings (like Form 10 filings with the SEC) is crucial. This information dictates how you'll assemble the final valuation.

1. Step 2: Value the Studio Segment.

This is often done using an EV/EBITDA multiple. ¹⁾

• Find the Studio's trailing twelve-month (TTM) or projected forward EBITDA. You can find this in quarterly and annual reports.
• Research comparable transactions. What have similar independent studios been acquired for? This will help you determine a reasonable multiple (e.g., 7x, 10x, 12x EBITDA).
• Multiply the Studio's EBITDA by your chosen multiple to get its estimated Enterprise Value.

1. Step 3: Value the STARZ Segment.

Valuing a subscription business like STARZ can be done in a few ways:

• EV/EBITDA Multiple: Similar to the studio, but you would use multiples from comparable subscription or cable network businesses.
• Per-Subscriber Value: Research what similar services have been valued at per subscriber in past acquisitions. Multiply this value by STARZ's total number of subscribers.
• Discounted Cash Flow (DCF): For a more advanced analysis, project STARZ's future cash flows and discount them back to the present. This is more complex but can provide a more fundamental valuation. discounted_cash_flow_dcf

1. Step 4: Sum the Parts and Subtract the Liabilities.

Add the estimated Enterprise Value of the Studio and the Enterprise Value of STARZ together. This gives you the total Enterprise Value for the combined company. To get to the Equity Value (what the shares are worth), you must subtract the company's net debt.

  > //Equity Value = (Studio EV + STARZ EV) - Net Debt//
- **Step 5: Calculate Per-Share Value and Apply a Margin of Safety.**
  Divide the final Equity Value by the number of fully diluted shares outstanding to arrive at your estimated intrinsic value per share. Compare this figure to the current stock price. If your estimated value is, for example, $20 per share and the stock is trading at $10, you have a potential 100% upside and a 50% [[margin_of_safety]].

The final number from your SOTP analysis is not a magic bullet; it's an estimate of value.

• A “High” SOTP Value vs. Market Price: This is the bull case. It suggests the market is undervaluing the company's assets and that the spin-off could act as a catalyst to close this gap. This is what a value investor is looking for.
• A “Low” SOTP Value vs. Market Price: This is a red flag. It might mean your assumptions are too conservative, or it could mean the company is genuinely overvalued, even considering its component parts.
• The Importance of a Range: Smart analysts don't arrive at a single number. They use a range of multiples (a “bear case” multiple, a “base case,” and a “bull case”) to create a range of potential intrinsic values. If the current stock price is below even the most conservative “bear case” valuation, the investment becomes highly compelling.

Let's create a simplified, hypothetical SOTP valuation for a fictional company, “Lion Star Media,” to illustrate the process. Assumptions:

• Lion Star Media's current market capitalization (stock price * shares) is $2.5 Billion.
• The company has $3.5 Billion in debt and $0.5 Billion in cash. Net Debt is $3.0 Billion.
• The company's total Enterprise Value (Market Cap + Net Debt) is $5.5 Billion.

SOTP Calculation:

Final Calculation:

• Total Calculated Enterprise Value: $6.7 Billion
• Less: Net Debt: $3.0 Billion
• Calculated Equity Value: $3.7 Billion

Conclusion: In this hypothetical example, our SOTP analysis suggests Lion Star Media's equity is worth $3.7 Billion. However, the market is currently valuing it at only $2.5 Billion. This represents a potential upside of nearly 50%. This gap between the market price and the calculated intrinsic value is the margin_of_safety that a value investor seeks.

• Value Unlock Catalyst: The planned separation is a hard catalyst that forces the market to re-evaluate the assets. It's not just a theoretical “what if” valuation.
• Deep Content Library: The 18,000+ title library is a difficult-to-replicate asset that generates high-margin, recurring revenue, providing a stable foundation for the more volatile studio business.
• Strong IP Franchises: Lionsgate has proven its ability to create and manage valuable franchises (John Wick, Hunger Games) that can be monetized across films, TV, games, and merchandise.
• Potential M&A Target: As a “mini-major,” the Lionsgate Studio could be an attractive acquisition target for larger media companies or tech giants looking to bolster their content libraries and production capabilities.

• High Debt Load: The company carries a significant amount of debt. A value investor must be confident that the post-spin companies can comfortably service this debt. High leverage increases risk. balance_sheet.
• Intense Competition: The STARZ segment operates in the hyper-competitive “streaming wars.” It lacks the scale and budget of giants like Netflix and Disney, which could limit its long-term growth and pricing power.
• Hit-Driven Studio Business: The studio's financial performance can be lumpy and unpredictable, relying on a consistent slate of successful films and TV shows. A string of box office flops could significantly impact earnings.
• Execution Risk: The spin-off itself carries risk. Delays, unfavorable market conditions, or a complex final structure could fail to unlock the expected value. The success of the investment thesis depends on management's ability to execute the separation effectively.

• sum_of_the_parts_analysis
• special_situations
• spin_off
• intrinsic_value
• margin_of_safety
• capital_allocation
• enterprise_value_ev