READ MORE:In April, MCN editors met with Starz CEO Chris Albrecht and key lieutenants, talking about consolidation (including possibly Starz) and the path he saw for his premium programmer and its OTT offshoot.  

In the wake of its $4.4 billion agreement to purchase Starz, Lionsgate CEO Jon Feltheimer said the studio is looking forward to “conversations” with its partners in Epix, hinting that those talks could include a possible exit from the fledgling premium channel.

Lionsgate announced its agreement to purchase Starz on Thursday. On a conference call with analysts to discuss the transaction, Feltheimer said while he is pleased with the Epix relationship, it "is not truly a strategic platform for us.”

“Our partners have known about the possibility of this transaction for some time,” Feltheimer continued. "I'll look forward to having conversations with them about maximizing our mutual investment.”

Asked later if those talks would include possible exit strategies from the service, Feltheimer was vague.

"There are a lot of possibilities that I'm not going to get into right now," Feltheimer said. "We think it is a very valuable stake and we look forward to having robust conversations with our partners to think through the overall pay television environment and think through the best way to monetize that stake."

Lionsgate formed Epix in 2009 with Paramount Pictures and Metro-Goldwyn-Mayer and while the multi-platform service has gained carriage with top providers like Dish Network, Charter Comunications and others, it has struggled to find an audience.

Feltheimer added on the call that Starz CEO Chris Albrecht is expected to continue to run Starz and play a “major part” in the leadership of the combined company. Albrecht recently signed a new contract with Starz keeping him in the fold through 2020.

Add Starz to the list of premium channels going over-the-top, as the home of original series like Outlander and Da Vinci’s Demons says it could have deals with new distribution partners in the “coming weeks.”

Starz would join Home Box Office, which launched HBO Now in April, and Showtime, which began offering its own OTT streaming product in July.  The news comes as Starz said it shed about 200,000 subscribers in the third quarter (its more widely available Encore channels lost 800,000 subscribers in the same period) mainly due to what it called “merger-related distractions” at some of its distribution partners.

Those subscriber decines helped send Starz stock down 10% ($3.69 per share) to $33.51 each on Friday.

In a conference call with analysts to discuss third quarter results, Starz CEO Chris Albrecht said that the OTT moves are being made to unlock “opportunities to distribute our content beyond the traditional cable bundle, tapping into the unmet demand we are seeing for our content, while at the same time still cultivating our core business with MVPDs.”

He added that in the coming weeks Starz plans to complete deals with “several new distribution partners.” He declined to name them.

Starz has been the source of intense merger speculation itself over the past few years, and has been rumored to be in talks with AMC Networks,21st Century Fox, and Lionsgate but has been unable to secure a deal. The entrance into the OTT arena comes as a bit of a surprise as the channel had earlier tried to positon itself as the “house brand” for its MVPD partners, serving as the exclusive MVPD premium service while its peers pursued digital distribution.    

Albrecht said the OTT service would expand the universe for both Starz and its MVPD partners.

But not everyone was convinced.

In a note to clients, Morgan Stanley media analyst Ben Swinburne wrote that like its larger premium counterparts Home Box Office and Showtime, Starz believes it can take advantage of the 10 million households that don’t subscribe to pay TV. But Swinburne noted that Starz doesn’t have the scale of HBO and Showtime. And the premium channel could face some backlash from distributors.

“Recall that in late 2012, Starz was forced (by our estimates) to accept ~10% rate step-downs from two large MVPDs – we believe in part a backlash from Starz' prior decision to distribute via Netflix in 2009-2011,” Swinburne wrote. “Therefore, while new distribution partners have the potential to drive revenue upside (particularly as new entrants traditionally pay high-end rates) we see significant offsetting downside risk to Starz' traditional revenue streams.”

Albrecht added that the decision to offer an OTT product is in line with Starz’ overall strategy to maximize the value of its content and isn’t merely following HBO and Showtime.

“We've decided that the time to move into that arena is now. We're actively talking with several companies,” Albrecht said.

Starz shares fell more than 15% in early trading Wednesday after the premium channel reported a 2% rise in revenue, but a 10% decline in profits and weaker than expected subscriber additions in the second quarter.

Starz shares fell as much as 15% ($6.77 each) to $38 per share in early trading July 29. The stock started to gain back some of that ground in later trading, down 11.3% ($5.06 per share) to $39.71 each at 11:02 a..m. It ended the day at $40.40, down just under 10%.

For the period, Starz reported revenue of $417.7 million, a 2% increase, and adjusted operating income before depreciation and amortization (OIBDA) of $123.4 million, up 5%. But the premium channel, which has devoted an increasing amount of its resources to original programming, saw its net income dip about 10% to $63.4 million, or 59 cents per share, from $70.1 million or 62 cents per share in the prior year.

Starz ended the quarter with 23.5 million subscribers to its Starz service, down from 23.7 million in the first quarter but up about 1.5 million from the same period in 2014. Its Encore unit ended the second quarter with 33.3 million subscribers, down from 33.8 million in the first quarter and 600,000 less than the 33.9 million tallied in the second quarter of 2014.

In a statement, Starz CEO Chris Albrecht said the company was pleased with results, adding that it is on track to meet its original programming goals.

"In addition, we had a very successful quarter in terms of original programming and remain on track this year to achieve our goal of 75-80 episodes of new Starz Original series,” Albrecht said in a statement. “Both the second season of ‘Power' and the first season of ‘Outlander' delivered strong viewership, as well as industry and fan accolades. Looking ahead, the balance of the 2015 originals slate is strong with ‘Blunt Talk,' ‘Survivor's Remorse,' ‘Da Vinci's Demons,' ‘Ash vs. Evil Dead,' and ‘Flesh and Bone.' Our original programming pipeline was also fortified with a great, new addition thanks to our green light of Neil Gaiman's ‘American Gods.' We are confident that robust original programming in combination with our quality movie offerings will further strengthen our distribution and subscriber relationships."

In a note to clients, Morgan Stanley media analyst Ben Swinburne said that although the subscriber numbers were lighter than expected, the year-over-year growth at Starz was encouraging in what he called a difficult premium market. But he said Starz’ relative lack of scale helps fuel the argument for consolidation.

“… we continue to believe [year-over-year] sub growth provides evidence that Starz' original programming strategy has traction with consumers,” Swinburne wrote. “However, since affiliate fee / distribution negotiations are also driven by scale, Starz' small size likely limits the financial gains that it can extract from its original content. Ultimately this underscores how Starz could benefit from industry consolidation.”

Starz is scheduled to hold a conference call with analysts to discuss second quarter results at 1 p.m. today.

Premium channel Starz added about 500,000 new subscribers in the third quarter, driven by new original series like Outlander and soundly beating analysts’ expectations, but revenue and cash flow growth missed targets.

Starz ended the quarter with 22.5 million subscribers, an improvement of 500,000 customers and well outpacing some analyst estimates of a gain of 200,000 subscribers. Revenue in the period was up 2% to $327.2 million and cash flow grew 3% to $109 million.

While Starz said it bought back about $93.6 million worth of its stock (about 3 million shares) in the quarter (ahead of most analysts expectations, revenue at its Starz Distribution unit – which develops and acquires content for distribution via DVD, digitally and via traditional television – were down $44 million to $73.5 million in the period, mainly because there were no significant new releases from partner The Weinstein Company or of any Starz original series.

Sterne Agee analyst Vasily Karasyov wrote in a note to clients that the quarter was a mixed bag for Starz – he was encouraged by the subscriber growth, margin improvement and buyback acceleration but less excited about higher marketing costs and lower profitability at the distribution segment of the company. That led the company to miss his revenue expectations by about $6 million and his cash flow predictions by about $7 million.

 “Our business continued to perform nicely in the third quarter as Starz Networks reported solid revenue, earnings growth and we reached a new high in Starz subscriptions of 22.5 million," said Starz CEO, Chris Albrecht in a statement. "We are pleased with the traction of our original programs. ‘Outlander' had a strong debut, viewership for ‘Power' finished up with great momentum and grew its viewership throughout the first season, and ‘Survivor's Remorse' continues to receive significant critical acclaim. We are very enthusiastic about our 2015 slate of original programming, which is the deepest to-date and launches with the second season of ‘Black Sails' in January. As demand for our content increases worldwide, we are providing subscribers multiple options. Recently, we confirmed details of a new partnership to offer Starz Play as a direct-to-consumer streaming SVOD service in select international markets and featuring Starz Original series."

ISI Group media analysts Vijay Jayant and David Joyce wrote in a research note that the quarter was solid but revenue was about $25 million short of their expectations, due to declines at Starz Distribution. The analysts were quick to point out those declines were not a concern “due to that stream's volatility and low margin. The core Starz Networks performance grew in-line with estimates.” They were encouraged by the subscriber growth, fueled by the popularity of Starz original series  Outlander, the buyback activity and moves to expand its Starz Play app to select international markets.