Moody’s might downgrade Starz

Moody’s Investors Service said it placed Starz, LLC’s Ba2 corporate family rating, Ba2 senior secured notes and Ba2-PD probability of default rating on review for downgrade.

The review was prompted by news that Lions Gate Entertainment Corp. has entered into a definitive agreement to acquire Starz for cash and stock.

Under the terms of the agreement, holders of each share of Starz series A common stock will receive $18 in cash as well as 0.6784 of a share of Lions Gate non-voting stock. Holders of each share of Starz series B will receive $7.26 in cash and 0.6321 shares of Lions Gate voting stock and 0.6321 shares of Lions Gate non-voting stock, the agency explained.

Each share of Lions Gate common stock will be reclassified into 0.5 voting and 0.5 newly created non-voting shares, Moody’s said.

Lions Gate also intends to raise $1.6 billion in debt to fund the cash portion of the deal, with the remaining portion of the acquisition cost being funded with stock.

Lions Gate also said it expects to refinance its debt and Starz’s debt at the closing of the deal, the agency added.

The downgrade review reflects an expectation for an increase in Starz’s gross debt levels following the transaction, Moody’s said.

The agency said it estimates that pro forma debt-to-EBITDA for the combined entity will be in the mid-5x range as of Dec. 31, 2016.

Despite the strategic benefits and potential synergies and cash savings associated with the deal, Moody’s said it believes incremental debt of $1.6 billion will adversely impact Starz’s credit profile.

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