Roku has been on a rugged roller coaster ride in recent months as it faces the limits of its dominant U.S. market position amid an ebbing pandemic. Now, the streaming company is partnering with “alternative investment”giant Apollo Global Management to acquire a slice of Starz, the Lionsgate-owned premium cable service. 

The deal promises to expand Roku’s modest library of original programming (Quibi leftovers won’t do it by themselves), and entree into legacy cable and subscription streaming. 

The real question is whether such a deal, for one-fifth or less of a decidedly niche content and streaming service provider, can make Wall Street care. There are reasons for skepticism, but also the possibility that this is the beginning of something much bigger.  

Like so many tech companies, Roku was an early-pandemic darling of the Street, supremely positioned to benefit from locked-down customers with little to do but play games, learn TikTok and guitar, and watch lots of streamed video. Just as the lockdown hit the United States, Roku shares sold for $76 apiece, substantially down from the previous fall. 

Fast forward to February, 2021, in the pandemic’s winter resurgence, and shares had leapt nearly 500%, to $468. They would crest even that vertiginous level a few months later, amid the summer virus comeback. These days, shares are around $96, notably above 26 months ago, but still far below even the fall of 2019. 

More problematically, Roku’s fall from Wall Street grace is about more than a rapidly evolving virus and how we’re responding to it. 

Also read: Roku Reports Q1 Net Loss, Decelerated Revenue Growth of Just 28%, But Beats Forecasts 

Roku indeed owns an admirable chunk of the streaming video universe, adding another 1.2 million active accounts, bringing to 61.3 million the worldwide users of its streaming devices and smart TV interfaces. The other part of its business, ad revenues on the Roku Channel and elsewhere, is up 39% year over year (to $233 million). Hours streamed is up 14%. 

Nice. But also, complicated.

Turns out that around 90% of Roku accounts are in North America. That’s a problem when just about everyone in North America already seems to have a streaming setup, and many are dropping dongles such as the classic Roku pucks and sticks to buy connected TVs with built-in interfaces. 

Just like Netflix, Roku faces home-market saturation amid growing competition from deep-pocketed, diversified competitors such as (we’ve heard this before) Apple, Amazon and Alphabet, plus that new Comcast-Charter tie-up. 

Yes, Roku CEO Anthony Wood talked a good game at Morgan Stanley’s investor conference in March, saying “Once Roku enters a market outside the U.S., our share starts to grow.” 

And yes, long-time Roku bear and Guggenheim analyst Michael Morris recently upped his target price by $10, saying the company’s international expansion is in its "early innings.” 

That’s all true. But is it enough to substantively displace Google/Android TV, Samsung, LG, Sony, Amazon, and endless cheap Android-based knockoffs around the planet? Probably not.

Targeting consumers in Europe and Latin America is a potential opportunity for more hardware sales, but what about India, the rest of Asia and Africa, where much of streaming video’s growth will come in the future? Even Roku’s cheap devices might face pricing pressure.

Supply chain headaches apply here too, as with any hardware maker. Smart TV shipments will drop 13% in the United States this year, so it’s getting more expensive and slow to make and ship devices around the planet. That will pinch margins. 

Meanwhile, Lionsgate has been trying to sell itself, or just Starz (as of last November), for what seems like eons, with no takers. That muted response in an overheated era says something about the market’s regard for Lionsgate’s assets and asking price. 

This past week, during the SeriesFest in Denver, long-time Lionsgate CEO Jon Feltheimer suggested other ways for Lionsgate to make itself more relevant, like resuscitating a proposed partnership with Netflix over three Knives Out movies. 

Lionsgate would theatrically distribute the two sequels (still in production) and Netflix would get to stream the hugely popular original. Netflix turned down Felt’s original proposal, but with Big Red suddenly in a different frame of mind, he said he’ll pitch the deal again. 

Lionsgate, like Sony, has been an “arms dealer,” profitably producing numerous shows for Netflix, HBO, Discovery and others. 

Starz, which Lionsgate acquired in 2016, has been equally scrappy, catering to dedicated Black and female audiences with fan-favorite franchises such as Power and its many spinoffs and Outlander. The service attracted some recent buzz with behind-the-scenes Watergate tale Gaslit, starring Julia Roberts as Martha Mitchell. Another promising show, horror-comedy series Shining Vale, featuring Courtney Cox and Greg Kinnear, just debuted.  

The key to all this may be Roku’s partner, Apollo. It has $48 billion in available cash for deals, with $513 billion in total assets under management, up 11%, according to last week’s quarterly earnings filings. Just the cash-on-hand total dwarfs any of the other companies involved in this potential deal.

And Apollo is no newcomer to entertainment. It tends to buy into companies with decent balance sheets that are part of declining industries. Previous deals include Cox, Endemol Shine, Gannett, Sirius XM, Redbox and Yahoo. That Starz (and for that matter, Roku) is potentially on that list probably says something important.

Does Apollo become the glue (and money) that binds a couple of smaller streaming players into one, more vertically integrated operation? Way too soon to tell. But the fact that Roku, looking for more reach, and Lionsgate, looking for more cash, are now in conversation with Apollo as backer suggests a much bigger deal may be on the horizon. 

Just what cable legend John Malone has in mind with the recent deal between three of his holdings – Lions Gate Entertainment, Liberty Global and Discovery Communications – is truly only known to him, but that hasn’t stopped the speculation wheels from turning at break neck speed.

Lions Gate announced Tuesday that Discover and Liberty Global will each pay $195 million for a 3.4% interest in the movie studio and content production house, buying a collective 10 million shares from a private equity firm MHR Fund Management, controlled by Lions Gate CEO Mark Rachesky.

The deal adds to Malone’s holdings – he is chairman of Liberty Global and is a board member at Discovery – and fits nicely with his own 3.4% interest in Lions Gate, which he acquired in February. IN that deal, Malone swapped a 4.5% interest in premium channel Starz for the Lions Gate interest. At the time, the transaction fueled speculation that Lions Gate would eventually purchase Starz, which had been looking for a buyer for years, outright.

The latest deal has heated up the Starz talks again, although Lions Gate CEO John Feltheimer, on a conference call with analysts to discuss third quarter results Tuesday said he would not talk about Starz from an M&A standpoint. He did say that he thought the premium channel had hit a “bump” in recent quarters.

“I think they're transitioning right now,” Feltheimer said.   

Whatever the outcome, Malone is known for his patience and a knack for doing exactly what his competitors expect him not to do – the deal does bring three of his holdings closer together. Whether that could mean a Starz deal for Lions Gate or some other transformational transaction, only time will tell.

But the deal allows both sides to increase their stake in the studio up to a point and with Liberty Global Lions Gate gets access to the largest cable operator in Europe for its content.

Lions Gate has had an impressive run over the past few years in the studio business – it owns franchises like teen vampire series Twilight and The Hunger Games – and has produced several cable hits like Mad Men, Nurse Jackie and Weeds.  

While the deal allows both Discovery and Liberty Global to enter into separate commercial agreements with Lionsgate for licensing rights to theatrical and television content across their markets, Liberty Global sold off its content arm – Chellomedia – to AMC Networks for $1 billion more than a year ago and Lions Gate’s past output seems distant from Discovery’s usual fare of documentaries and reality shows. In a statement, Discovery CEO David Zaslav, who along with Liberty Global CEO Mike Fries will get a seat on Lions Gate’s board, said he was looking forward to the partnership.

"Lionsgate has created a strong television business and we are proud to take this ownership stake to gain access to terrific storytellers, creative leadership, and global formats and IP, in both nonfiction and scripted programming,” Zaslav said in a statement.  “As with all of our creative partners, we look forward to telling world-class stories with Jon and the deep management team at Lionsgate, and further strengthening Discovery's content pipeline across our linear and digital platforms around the world."

Discovery Communications and Liberty Global have teamed up with content provider Lions Gate Entertainment, each purchasing a 3.4% interest in the movie studio and TV production house for a combined $390 million.

Both Liberty Global and Discovery agreed to each buy 5 million shares of Lions Gate stock for $195 million each.    

The 10.0 million shares will be acquired from funds affiliated with MHR Fund Management LLC.

Additionally, Liberty Global and Discovery Communications will each have one designee appointed to Lionsgate's Board of Directors -- President and CEO Mike Fries for Liberty Global and President and CEO David Zaslav for Discovery Communications. Liberty Global and Discovery Communications are each entering into separate commercial agreements with Lionsgate providing for a preferred partner relationship with respect to licensing rights for certain theatrical and television content across their markets.  The share acquisitions are expected to close later today.

“We’re very enthusiastic about this alliance with Lionsgate, and I’m pleased to join Chairman Mark Rachesky and the rest of the Lionsgate Board,” Fries said in a statement. “The company is a unique success story in the entertainment industry. Lionsgate is led by an incredible management team and they’ve created one of the deepest portfolio of brands and franchises in the industry. This strategic content investment will also create opportunities for Lionsgate to become an even more important supplier of high-end premium content to our 24 million video and 18 million broadband subscribers.”

The moves come about nine months after Liberty Global chairman (and Discovery board member) John Malone personally purchased a 3.4% interest in Lions Gate by swapping a 4.5% stake he held in premium channel Starz.

Lionsgate will be entering into certain agreements with Liberty Global, Discovery Communications, Malone and MHR Fund Management LLC. These agreements are intended to include among other things, rights pursuant to which Liberty Global, Discovery Communications and MHR Fund may designate members to the Lionsgate Board of Directors subject to certain share ownership thresholds and under which they have each agreed to vote the common shares owned by them (together with certain of their affiliates) in favor of each of the other’s respective director nominees.  The agreements are also intended to include restrictions of purchases and sales of Lionsgate common shares for prescribed periods of time, together with rights and obligations relating to certain corporate actions with Lionsgate during such time.

"One of Discovery's advantages is our ownership in a diverse portfolio of global content and IP, which uniquely positions the company to deliver an audience across multiple media ecosystems," Zaslav said in a statement. "Lionsgate has created a strong television business and we are proud to take this ownership stake to gain access to terrific storytellers, creative leadership, and global formats and IP, in both nonfiction and scripted programming. As with all of our creative partners, we look forward to telling world-class stories with Jon and the deep management team at Lionsgate, and further strengthening Discovery's content pipeline across our linear and digital platforms around the world."

A designee of MHR Fund Management, MHR principal and investment committee member Emily Fine, also will join the Board.  Frank Giustra, who has served a total of 11 years on the Board, will step down.

"David and Mike are highly accomplished and respected executives who will bring added depth and vision to our Board of Directors," said Dr. Mark Rachesky, Chairman and largest shareholder of Lionsgate. "I was a very early believer in the value of content, and these new strategic relationships with two of the pre-eminent programming and distribution platforms in the world help position us to take the Company to the next level."

LionTree Advisors acted as exclusive financial advisor to Discovery and Liberty Global.