Benchmark defends Lions Gate spin process even as stock tumbles hard

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Lions Gate Entertainment has tumbled harder Thursday - (NYSE:LGF.A) -12%, (NYSE:LGF.B) -11.6% - after it updated its plans to separate its Starz TV network from its studio business.

That came with the emphasis that the company is likely to spin out the studio rather than Starz - and it's not surprising that the content unit is attracting more strategic investor interest, Benchmark says.

The result doesn't really change, analyst Matthew Harrigan notes: You get two fully detached companies, and both balance sheets prospectively benefit from equity injections from outside.

"Management will admittedly not achieve its aim of announcing a definitive result this month, likely complicated by the currently challenged global equity and credit markets, although the self-imposed artificial September deadline did not help Lionsgate’s negotiating posture," Harrigan said.

The motion picture and TV studios are the "primo" assets, given streaming valuation concerns, but Starz is also drawing interest from multiple investors, he noted - supporting deleveraging for both SpinCos in the endgame. A structure that results in the spin of the StudioCo rather than Starz probably delivers some financial engineering benefits, though.

Harrigan trimmed his price target on LGF.A to $18 from $20, implying 157% upside, mainly due to a normalized price/earnings ratio for the broader market. "We estimate the market is now assigning a negative Starz value if the studio assets are assessed at a full discounted cash flow valuation," he says, noting that even if the spin delays continue, the stock looks undervalued.