In this Nov. 16, 2015 file photo, a staffer hands out Mockingjay pins with the French tricolor at the Los Angeles premiere of "The Hunger Games: Mockingjay - Part 2" at the Microsoft Theater.Jordan Strauss
Shares of Hollywood studio Lions Gate Entertainment Corp. plunged Friday after it missed earnings expectations due to the underperformance of the finale of The Hunger Games and investors fled as hopes diminished for the company to become an acquisition vehicle.
The stock collapsed more than 27 per cent to close at $18.53 (U.S.) Friday, its lowest level in more than three years. Trading volume was heavy, almost 10 times the average.
Cowen & Co. analyst Doug Creutz said Friday that a whole slew of investors who had piled into the stock on the hope that media titan John Malone would use it as a vehicle to buy up more companies were now dumping it because of its shrinking market capitalization.
Acquisition targets would have benefited from being part of Lions Gate, a Canadian corporation with a lower tax rate, but certain regulations would prevent Lions Gate from buying larger companies, he said.
"With the [Lions Gate] stock having gone down, it makes it harder for them to do a deal," Creutz said. "That's why you're seeing Starz down in sympathy."
Shares were also down 22 per cent in Starz, which finished at $24.30. Lions Gate said Thursday that it was in talks to merge with Starz, a company it has had a 15-per-cent voting stake in since last year.
Malone, who has stakes in both companies, told The Wall Street Journal in June that Lions Gate could "buy Starz and potentially other free radicals in the industry." The talk accelerated speculative interest in Lions Gate shares.
But one problem Creutz sees in Lions Gate buying Starz is that it could constrain where Lions Gate sells its TV shows. The studio already has strong demand for its shows such as Orange is the New Black and Nashville from services like Netflix and ABC.
"The company already enjoys the ability to sell its content to whatever network is willing to pay the most for it; being tied to Starz for some content would be unlikely to make Lions Gate better off," Creutz wrote in a note Thursday.
In the latest quarter, The Hunger Games: Mockingjay Part 2, did worse than expected at home, but also in China, where it was squeezed between big movies such as Spectre and The Martian and had difficulty getting on as many theatre screens as it wanted, executives said on a conference call Friday.
Revenue in the quarter through December fell 11 per cent to $670.5-million, far worse than the $767-million expected by analysts polled by FactSet. Adjusted earnings came to 45 cents per share, short of the 47 cents per share expected.