Analyzing John Malone's Complex Courtship of Lionsgate

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"John has been a pioneer in content distribution," Jon Feltheimer (left) said when Malone joined the Lionsgate board.

The mogul's Liberty Global ups its stake in the 'Hunger Games' studio as speculation of a merger with Starz (or a tax dodge) builds.

This story first appeared in the Nov. 27 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

A year after Alibaba Group failed to acquire a 37 percent chunk of Lionsgate, the studio that opens The Hunger Games: Mockingjay — Part 2 on Nov. 20 again finds itself the subject of rampant speculation that it will merge. This time, blame John Malone for getting Wall Street tongues wagging.

The billionaire said Nov. 10 that Discovery Communications and Liberty Global, in which he owns stakes of 29 percent and 25 percent, respectively, each had purchased a 3.4 percent share of Lionsgate. Since Malone has a track record for incrementally building positions in companies until he controls them (recent example: Sirius XM Radio), it stands to reason he has his sights set on somehow acquiring Lionsgate, where he has been a board member since February.

He signaled as much Nov. 12 during an investors day for Liberty Media, another company he controls. “The store is always open. … We don’t rule anything out,” Malone said when asked if he’d like to acquire Lionsgate.

That day, Malone said Liberty would recapitalize into three tracking stocks — Liberty Media Group for its interests in Live Nation, Time Warner and Viacom; Liberty Braves Group, consisting of the Atlanta Braves baseball team; and Liberty Sirius Group for its majority stake in Sirius. It seems natural that a big slice of Lionsgate could be folded into the Liberty Media portion of those holdings or that the studio could be acquired by Discovery, which has a $17.4 billion market cap (Lionsgate’s is $5.6 billion).

But Lionsgate also would be a nice merger partner for Starz (market cap: $3.4 billion), the pay TV company led by Chris Albrecht in which Malone controls 33 percent of voting shares. In fact, Malone got his board seat at Lionsgate as part of a transaction nine months ago where he swapped some of his Starz stock for Lionsgate shares.

FBR & Co.’s Barton Crockett figures Malone will beef up his Lionsgate stake by trying to get the 20 percent owned by chairman Mark Rachesky, thus providing a pipeline of content for Discovery, Starz and other Liberty assets. Lionsgate, after all, makes such hit shows as Orange Is the New Black and Nashville. But its film side is less robust. “Lionsgate has a big task ahead to replace the windfall from the Hunger Games,” says Steve Birenberg of Northlake Capital Management. “Thus far, none of the hoped-for franchise breakouts have clicked, the latest miss being The Last Witch Hunter.” On Nov. 9, Lionsgate reported a $7.2 million write-down on the Vin Diesel thriller.

Some observers believe Malone would like to use Lionsgate’s status as a company based in Canada to cut his tax bill elsewhere, much like Liberty Global became a U.K. company by acquiring Virgin Media. “A lot of investors are expecting an inversion will happen sooner rather than later and Starz will travel the same path that Liberty Global traveled,” says tax expert Robert Willen.

Morgan Stanley’s Benjamin Swinburne thinks Malone might begin next year to transform Starz into a Canadian company through a deal with Lionsgate, thus boosting profit at Starz via a lower tax rate. Starz is the quicker solution since there is an agreement stipulating that Discovery and Liberty Global, together, not purchase more than 18.5 percent of Lionsgate through November 2020, says Swinburne.

An easy solution, therefore, is for Malone to arrange for Lionsgate to purchase Starz and keep the combined company in Canada, says Eric Wold of B. Riley & Co. And Lionsgate under CEO Jon Feltheimer isn’t averse to acquisitions. On Nov. 12, it paid about $200 million for a majority stake in Craig Piligian’s Pilgrim Studios, which produces unscripted fare. Wrote Wold after the Pilgrim deal, “Lionsgate is an acquirer, not a target (for now).”

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