Lionsgate to Acquire Starz in $4.4 Billion Deal

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Lionsgate CEO Jon Feltheimer

The long-awaited deal brings together two companies in the universe of billionaire investor John Malone.

Lionsgate has agreed to acquire Starz for $4.4 billion in cash and stock, and including debt, to create what the company said would be a global content powerhouse.

The agreement, unveiled Thursday morning, is the culmination of on-again/off-again talks between the companies in which cable pioneer John Malone owns stakes. Malone, who also owns a big stake in Discovery Communications and is chairman of Liberty Media and Liberty Global, has talked about the need to boost the scale of smaller content companies amid pay TV consolidation and globalization.

Wall Street observers have said a combined Lionsgate-Starz could over time acquire further content companies that aren't entertainment conglomerates. Analysts have long seen Starz signaling a possible sale to a bigger company as a precursor to a hookup between the cable company and Lionsgate.

Lionsgate CEO Jon Feltheimer during a morning conference call argued the Starz acquisition will "derisk" the studio and achieve "significant synergies," which were not outlined. "This is a combination that unlocks significant, immediate and long-term value for our shareholders," he told analysts, while also creating a "global content powerhouse" that will invest around $2 billion annually in new content and provide "increased scale to compete even more effectively and capitalize on growth opportunities in a fast-changing marketplace."

As part of the Starz deal, Feltheimer will remain CEO of the combined entity, while Michael Burns remains vice chairman. Chris Albrecht, whose contract was just extended through 2020, will remain president and CEO of Starz, running the premium cable network as he joins Lionsgate's executive committee with expanded duties. "I'm thrilled to be here and to work with Jon and the whole Lionsgate team. The opportunities are enormous. All these conversations that we have had before this have highlighted those opportunities," Albrecht told analysts during the call. 

The deal for Starz puts a question mark over Epix in which Lionsgate is a minority investor in a three-way joint venture with Viacom and MGM. "The fact of the matter is, at 31 percent, Epix is not a truly strategic platform for us," Feltheimer told analysts, before indicating talks on a possible stake sale with its partners will follow. 

The sale provides Lionsgate with new content for its Defy, Pop and Epix platforms and expands distribution for the premium cable channel. For Lionsgate, Starz's subscription-based businesses could help reduce the studio's volatility from a hit-driven movie business, something it already has been growing with its fast-expanding TV production division. 

Based on Lionsgate's 20-trading day volume-weighted average stock price as of Tuesday, the price tag represents a value of $32.73 per share to Starz shareholders, an 18 percent premium to Starz's 20-trading day weighted average price.

"Where we see almost greater value for Lionsgate is in the predictability of Starz's cash flows," Ben Mogil, an analyst with Stifel, said Thursday in an investment note. "Having just finished a difficult fiscal year, the vagaries of the film business were in full show, and we believe that one of the attractions of Starz was as an anchor to a film business which has been increasingly volatile for players," he added.

The combined company will have a 16,000-title film and TV library, making it what Lionsgate said is the largest independent television business in the world, with 87 original series on 42 U.S. networks. The new entity will also include the operation of or investment in 30 channel platforms around the world, namely the flagship Starz platform that reaches 24 million U.S. subscribers, the Starz Encore network with over 32 million subscribers and five OTT services. 

Lionsgate also highlighted a "growing presence in location-based entertainment and video games driven by the company's deep portfolio" of brands and franchises.

"The combination of Lionsgate and Starz brings significant scale to our portfolio of content and distribution assets and will enable us to compete successfully in today's rapidly evolving global entertainment marketplace," said Lionsgate chairman Mark Rachesky. "By bringing together complementary resources, premium quality intellectual property and exceptional management, this strategic transaction positions us extremely well to unlock the underlying value of our content to create substantial lasting value for our shareholders."

Shares in Lionsgate and Starz rose sharply in pre-market trading on news of the cash and stock deal. Shares in the studio rose $1.82, or nearly 9 percent, to $20.94. Starz saw its shares jump $3.00, or 11 percent, to $31.25.

Lionsgate, which has a Canadian domicile, earlier confirmed negotiations with Starz as Liberty Media's Malone, who has a controlling stake in Starz, eyed a cross-border merger to avoid the U.S. tax net. "We have the extended benefit of being a Canadian multinational company. This will immediately drive incremental cash savings," Lionsgate CFO James Barge told analysts on Thursday.

Lionsgate's Feltheimer and vice chairman Michael Burns said earlier in a statement that the transaction united two companies with strong brands and complementary assets. "We expect the acquisition to be highly accretive, generate significant synergies and create a whole that is greater than the sum of its parts. Chris Albrecht and his team have built a world-class platform and programming leader, and we're proud to marshal our resources in a deal that accelerates our growth and diversification, generates exciting new strategic content opportunities and creates significant value for our shareholders," they said.

The agreement has been approved by the boards of directors of both firms and will be submitted to their respective shareholders for approval as well as to regulatory authorities. The deal is expected to close by year's end. Starz had said in early February that Lionsgate "intends to explore whether there is a potential mutually beneficial combination of the two companies."

A year before that, cable pioneer Malone had struck a deal to swap some Starz shares for a seat on the indie studio's board. The deal gave Lionsgate a 4.5 percent economic stake in Starz and 14.5 percent voting stake.

Besides more collaboration between Lionsgate and Starz, FBN Securities analyst Robert Routh said the stock exchange agreement is a "precursor" to an eventual merger of the two entertainment companies.