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Can Lions Gate Get Lion’s Share for TV Guide?

1/23/2012 12:01 AM Eastern

Lions Gate Entertainment, the studio
that produces cable stalwarts like Mad Men, Weeds
and Nurse Jackie, has hired an investment banker and
is considering a sale of its TV Guide Network, according
to published reports.

Lions Gate purchased TV Guide Network in February
2009 for about $240 million and, in May of that
year, sold 49% of the network to JP Morgan Chase’s
One Equity Partners and Allen Shapiro for about
$122 million.

According to a report in the New York Post, Lions
Gate hired an investment banker about a month ago
and has spoken to several interested parties about the
channel. Lions Gate’s options include selling its 51%
stake in the network to its partners, acquiring its partners’
49% interest or selling the entire network outright to a
third party. According to sources familiar with the situation,
the third option is the most likely.

CONTENT INVESTMENTS

Since buying TV Guide Network in 2009, Lions Gate has
tried to beef up the channel, adding original programming
like Nail Files and the upcoming Hollywood Moms’ Night
and Wilson Phillips: Still Holding On, along with episodes of
Weeds and Curb Your Enthusiasm and movies. Lions Gate
has also made moves to make the channel full-screen in
the majority of its markets — some of its old carriage contracts
require digital-channel listings to scroll over as much
as half of the TV screen. When Lions Gate bought the channel
in 2009 it had about 32% full-screen penetration. That
has increased to 60% in 2011 and the company has targeted
80% full-screen penetration by the end of this year.

But the channel has struggled financially. According to
regulatory filings, the network reported a net loss of $20.5
million in the first six months of fiscal 2012 — up from $13.8
million in 2010. Revenue during the same period dipped 11%
to $50.8 million from $57.1 million in the previous year.

Miller Tabak media analyst David Joyce estimated in a research
note that declining cash flows at TV Guide Network —
he estimated it would generate $7 million in cash flow in fiscal
2012, down from about $35 million in 2009 — could impact its
potential sales price. At a 14 times multiple, Lions Gate would
only receive about $30 million for its interest in the network.
But TV Guide’s near full-distribution status, as well as the belief
that its current affiliate fee of 6 cents per subscriber per month
will rise in the future, could help drive up the price.

“We believe a strategic buyer with more access to content
and with an array of cable networks already in its portfolio
could justify a higher valuation, given synergy potential
(including negotiating power to bundle the networks
when seeking carriage fee increases and when acquiring
programming),” Joyce wrote.

A Lions Gate spokesman declined comment.

Lions Gate had high hopes for the channel as a potential
outlet for its content, but the studio’s cachet has waned somewhat
since October 2009, when it partnered with Viacom’s Paramount
and Metro-Goldwyn-Mayer to form Epix, a premium
entertainment service available in about 30 million homes.

STRATEGIC FIT

Despite low ratings — TV Guide averaged about 84,000 viewers
in 2011, down 20% from 105,000 according to the Post, citing
Nielsen ratings provided by TVBythe-Numbers.com – the network is available
in about 83 million homes, which
would make it attractive to both financial
and strategic players.

Lions Gate has been monetizing
its non-core assets over the past several
months. In June, it sold Maple
Pictures to Alliance Films for about
$38.5 million. And it has been an active
acquirer, primarily of fi lm studio
assets. Last week, Lions Gate closed
on its $412.5 million purchase of
Summit Entertainment, producer of
the Twilight franchise.

September