Lionsgate-Starz Merger Threatened by New U.S. Tax Inversion Rules, Analyst Says

Murray Close/LIONSGATE

Curbs on U.S. companies taking a foreign address to reduce their tax bill could thwart John Malone's media mashup involving the 'Hunger Games' studio.

New U.S. Treasury Department curbs on tax inversions threaten any potential merger between Starz and Lionsgate, a Morgan Stanley analyst warned Tuesday.

The U.S. Department of Treasury on Monday unveiled new restrictions on American companies moving abroad for lower tax rates.

Benjamin Swinburne, an analyst at Morgan Stanley Research, in an investors' note said the new curbs on U.S. companies taking a foreign address to reduce tax bills would "reduce Lionsgate's ability to lower Starz's corporate tax rate down to Lionsgate's mid-teens rate...especially since the vast majority of Starz's earnings come from domestic operations."

Spokesmen at both Lionsgate and Starz declined to comment on the U.S. taking action against tax inversions, and any impact on their merger and acquisition strategies.

Lionsgate, which has a Canadian domicile, earlier confirmed negotiations with Starz as Liberty Media's John Malone, who has a controlling stake in Starz, eyes a cross-border merger to avoid the U.S. tax net.

"...The rules could weigh on longer-term plans if such a combination were intended to be the first step in a potential broader Lionsgate plan to use tax synergies to roll up smaller cap 'free radical' U.S. media companies," Swinburne said. Last year, Malone first talked about Lionsgate buying Starz and other "free radical" U.S. companies as part of a broader industry consolidation.

Malone at the time swapped a portion of his stake in Starz for a bit of The Hunger Games studio. That investment followed speculation that Starz was looking to sell itself to a bigger company, with some analysts seeing that as a precursor to a hookup between the cable company and Lionsgate.

A merger of Lionsgate and Starz is not thought to be imminent.

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