The long-rumored tie-up in media finally happened yesterday: Lions Gate (LGF) bought Starz (STRZA) for $4.4 billion.
Both sides spent time on their conference call explaining the benefits of Lions Gate's Canadian tax domicile, future cost synergies they expected to derive from the deal, as well as the value of their respective film libraries. However, the deal was of particular interest to Viacom (VIA) investors for another reason.
Starz ended up being taken out for a 10x enterprise value (EV)-to-EBITDA multiple. For most of the last couple of years, Viacom has traded at a multiple below 10x. While there have been good reasons for this discount -- excessive executive compensation, poor ratings, concerns about new affiliate revenue deals being renewed, a collection of cable assets aimed at a younger demographic, and no clear path forward in digital -- yesterday's deal is a reminder about the baseline against which media companies are valued these days, especially to potential buyers.
The Starz deal offers hope for Viacom investors who -- beyond the court battles going on between National Amusements and Viacom CEO Philippe Dauman -- believe their investment is being deeply undervalued.
At yesterday's close, Viacom's non-voting shares closed with a trailing EV-to-EBITDA ratio of 7.5x. If the shares were valued at 10x instead, Viacom's EV would be $37.8 billion instead of $28.5 billion. With $12.5 billion in debt and approximately 400 million shares outstanding, that implies a per-share stock price of $63 vs. yesterday's close of $41.
Prior to the lawsuits between Dauman and National Amusements, Viacom's CEO had been working on a deal to sell off a 49% stake in Paramount. Dauman had suggested he was close to a deal with an interested party that valued Paramount (in total) at $8 billion post-taxes paid. This implies Viacom receiving $4 billion post-taxes, which Dauman hinted could be used to bring down the company's debt levels. If all $4 billion was used to retire debt, the implied per-share value for Viacom's stock would be closer to $73 instead of $63.
If $2 billion was used to retire debt, while $2 billion was used to shrink Viacom's share count at an average cost of $45 a share, the implied per-share value for Viacom's stock (again using a 10x EV-to-EBITDA multiple) would be $77.
The most positive way to spend an incremental $4 billion from a potential Paramount stake sale would be to purely shrink the share count. If you did -- again assuming an average cost of $45 per share -- you could theoretically push the per-share price to $81, even maintaining the $12.5 billion in debt.
Of course, it's not clear that the market would be willing to sign up for assigning a 10x multiple to Viacom's EBITDA stream. Wall Street has had deep mistrust of Dauman's leadership for some time. They might want to wait and see more signs of a turnaround at Comedy Central and MTV. They may want more explanation for why Samantha Bee's new show on Turner regularly gets double the ratings as The Daily Show With Trevor Noah and yet Comedy Central never even considered her as a host to replace Jon Stewart while she worked there.
What is clear, though, from the Starz transaction is that, with or without Dauman, Viacom's shares are cheap in comparison to media peers. With some more capital to spend from a stake sale in Paramount, Viacom could help unlock even more of that value.
Most important, though, is that Viacom starts to install a truly creative culture, which can help drive new hit shows and stronger ratings. This has been a missing element for a decade. For that to happen, it will likely require new management at the top.