Lionsgate (LGF) Ratings Remain on CreditWatch Negative Amid Move to Acquire Starz (STRZA) - S&P

S&P Global Ratings said that its ratings on Lions Gate Entertainment Corp. (NYSE: LGF), including the 'BB-' corporate credit rating, remain on CreditWatch, where we had placed them with negative implications on March 16, 2016.

"The CreditWatch placement reflects the risk that Lions Gate's credit measures might not improve to levels appropriate for the 'BB-' rating and the company's announcement on June 30, 2016, that it will acquire Starz LLC in a combination of cash and stock," S&P Global Ratings credit analyst Khaled Lahlo. The combined company will have an improved business risk profile (fair versus weak for Lions Gate on a standalone basis) due to the increased operational diversification. We expect that the revenue and cash flow stability of Starz's cable networks will offset the inherent volatility of Lions Gate's motion picture segment and the increased scale of distribution.

"Although we expect incremental cost savings primarily from a tax standpoint, we believe the acquisition will weaken Lions Gate's core financial measures," said Mr. Lahlo. "The company's pro forma adjusted leverage, including production loans and about $4 billion of total debt at the consolidated entity, was above 9.1x as of March 31, 2016."

Lions Gate's credit measures have worsened over the past few quarters due to the underperformance of its recent releases, particularly "Gods of Egypt" and "The Hunger Games: Mockingjay, Part 2." This affected the company's credit measures in two ways: it depressed cash flow and caused the company to increase its borrowings (production loans) to fund its upcoming film slate.

The ratings were placed on CreditWatch negative, based on our expectation that Lions Gate's upcoming film slate could underperform our expectation, and the lack of new franchises could cause the company's cash flows and credit ratios to further deteriorate.

In resolving the CreditWatch placement, we expect to assess the combined company's ability to generate cash flow and reduce leverage. This assessment will also include management's financial policy and its commitment to reducing debt. From a business profile standpoint, we would view the transaction positively because it brings operational and financial diversification and improved scale for content production and distribution.

However, the negative CreditWatch placement reflects the risks to our base case scenario as continued weakness in the company's credit measures in fiscal 2017 could lead to a lower rating. Conversely, if we believe that Lions Gate's adjusted leverage were to remain above 5x, we could lower the corporate credit rating by one or two notches, depending on our assessment of the company's leverage, cash flow, and liquidity.

You May Also Be Interested In

• IBM tumbles on soft Q1 revenue; announces HashiCorp $6.4bn acquisition
• HashiCorp Inc (HCP) PT Raised to $35 at Piper Sandler
• XOMA (XOMA) Earns $9M Milestone as FDA Grants Accelerated Approval to Day One’s OJEMDATM