SEC Filing Reveals John Malone Backed Lionsgate Against Rival Bids for Starz

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The two companies have unveiled the structure of the global content powerhouse intended with their $4.4 billion deal.

Lionsgate's SEC filing for its Starz merger, unveiled on Monday, reveals billionaire investor John Malone backed The Hunger Games studio in its $4.4 billion takeover of the cable premium channel, against at least two other rival bids.

And for good reason, as the SEC filing gives clarity to synergy numbers and expected tax savings, always a key aim for Malone in any deal-making. The S-4 indicates operating cost synergies from the proposed merger exceeding $50 million and annual cash tax savings of over $150 million through fiscal 2021.

With Malone eyeing tax benefits in all his deal-making, Lionsgate, which has a Canadian domicile, has long offered the potential for a cross-border merger that allows the billionaire investor and Starz to avoid the U.S. tax net. Lionsgate and Starz in the filing also estimate the combined entity will have pro forma revenue of $4.55 billion in 2017 and combined EBITIDA of $750 million for a combined entity with a 16,000 film and TV library, "one of the world's largest," the biggest indie TV business worldwide and nearly 90 TV shows on 40 networks.

And the new entity will run or invest in 30 channel platforms around the world, including the flagship Starz platform that reaches 24 million U.S. subscribers, the Starz Encore network with over 32 million subscribers and five OTT services. "We join our respective boards in their recommendations and look forward to the successful combination of Lionsgate and Starz," Lionsgate CEO Jon Feltheimer and Starz CEO Chris Albrecht jointly said in the Aug. 1 document that files the proposed deal's paperwork with the feds.

The SEC filing, as it lifts the curtain on recent deal-making, reveals Malone was key to swaying the Starz boardroom and outside advisers to get behind an eventual merger deal with Lionsgate, and to vote against at least two other rival bids. Lionsgate on June 30 agreed to acquire Starz for $4.4 billion in cash and stock, and including debt, to create what both companies said would be a global content powerhouse.

The agreement was the culmination of on-again/off-again talks between the companies in which cable pioneer Malone owns stakes and figured largely. The background to the merger, according to the SEC filing, goes back to early 2014 when the Starz boardroom, led by CEO Chris Albrecht, hired LionTree Advisors to consider a possible sale of the company.

Throughout 2014, the S-4 filing said Starz held "preliminary and informal conversations" with a range of suitors. One was Lionsgate, which as early as Sept. 2014 offered a non-binding proposal to acquire the premium cable channel.

By the end of 2014, John Malone, a major Starz shareholder, joined the talks with Lionsgate on a possible deal, without the studio putting forward a formal offer. And Malone and Lionsgate by January 2015 had negotiated a deal in which the billionaire investor exchanged stock in Starz for shares in the studio, and Malone joined the Lionsgate boardroom.

Malone, who also owns a big stake in Discovery Communications and is chairman of Liberty Media and Liberty Global, had already been talking about the need to boost the scale of smaller content companies amid pay TV consolidation and globalization. In early 2015, the SEC filing reveals Starz was talking to Lionsgate and two other possible suitors, referred to only as Company A and Company B.

"None of these discussions resulted in negotiations to sell the company," the filing stated. In Dec. 2015, talks between Lionsgate and Starz were on again. Company A in January 2016 also indicated interest in resuming deal talks, which continued until April 4 when no "mutually agreeable terms" on a merger could apparently be reached, the filing reported.

Also in April, talks with Lionsgate restarted, even as ongoing discussions in spring 2016 with a Company B took place on a separate proposal for a controlling interest in Starz, without an outright buy. With Starz talking to at least two other companies on a possible deal, LionTree received word from Lionsgate in May indicating the studio "may be interested in making an offer for all of Starz," the filing said.

The Lionsgate board met on May 23, without Malone in the room, to authorize a non-binding proposal to be drawn up that was ultimately delivered to Starz on June 2. Then on June 4, Liberty Media CEO Greg Maffei told Lionsgate vice chairman Michael Burns the per-share offer was "insufficient."

Starz also restarted talks with Company A around the same time, and fielded a rival offer. And Company B still figured in the mix. On June 20, the SEC filing indicates Starz execs and advisors met to consider all offers on the table.

During that meeting, however, the SEC filing stated Malone warned that, while he wanted a deal in the interest of Starz shareholders, he "was inclined to nonetheless transfer his interest in Starz to Lionsgate in a private transaction." With Malone signaling opposition to the rival bid from Company A, the Starz committee voted to ask for a final and best offer from both possible suitors.

On June 22, Lionsgate returned with a revised offer that included better share exchange terms, according to the filing. Malone was meanwhile holding separate discussions with Lionsgate on the fate of his Starz common stock.

By June 24, a Starz special committee recommended acceptance of the proposed merger offer from Lionsgate and, after continued negotiations, a formal acquisition offer for Starz was unveiled by the studio on June 30. In the SEC filing released Monday, Lionsgate, while projecting around $150 million in expected tax savings, also discussed the tax implications of its merger with Starz after recent Treasury Department curbs on American companies moving abroad for lower tax rates.

The studio in the regulatory document warned the temporary rule changes could impact its status as a company headquartered in Vancouver, and so having a Canadian domicile. If Lionsgate were to be treated as a U.S. corporation for U.S. federal tax purposes, it could be subject to "substantial liability for additional U.S. income taxes," the studio said.

Lionsgate also said the $50 million in annual cost savings anticipated would come from eliminating duplication and the advantages of scale in production, manufacturing and marketing costs. The studio in its filing added "the merger will significantly increase the combined company's content creation capabilities, enhance its ability to create leading premium scripted programming, a key growth category, and improve the scale of its global distribution footprint across mobile, broadband, cable and satellite platforms."

 

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