Lionsgate Stock Surges After Report It Could Merge With Starz

Shares of Lionsgate Entertainment flew 9 percent higher in after-hours trading Monday after a report said the film and TV studio is in advanced negotiations to merge with Starz, shares of which rose more than 10 percent.

Neither Starz nor Lionsgate would comment on the report, which first surfaced in the L.A. Times on Monday.

To be sure, Starz seems perpetually in search of a merger, and just a few weeks ago CEO Chris Albrecht didn't bother to deny reports that the company was in discussions to combine with AMC Networks.

"Conversations happen all the time," Albrecht said in September about a possible merger with AMC, or any other company.

And speculation has been rampant, in particular, that Lionsgate and Starz might merge, or at least work together more often, ever since John Malone swapped a portion of his stake in Starz for a bit of Lionsgate.

Malone's stock swap happened in February, when the billionaire media mogul took a 3.4 percent stake in Lionsgate and earned a spot on the board of directors. In return, Lionsgate got 4.5 percent of Starz and 14.5 percent of the voting shares. The transaction left Malone with 32 percent of Starz.

Malone, chairman of Liberty Media, is in the midst of combining Charter Communications (27.3 percent owned by Liberty) with Time Warner Cable, and he's been a proponent of consolidation in the entertainment industry.

None of this, though, suggests that a merger of Lionsgate and Starz is imminent, though Wall Street's reaction Monday suggests that it's a very probable scenario. After rising 1.4 percent to $39.18 in regular trading, Lionsgate shares shot up another $3 after the closing bell once the Starz news surfaced.

Shares of Starz rose 4 percent during the regular session to $39.07 and advanced another $4 after the closing bell.

As of the end of trading Monday, Lionsgate was the more valuable company, with a market capitalization of $5.81 billion and an enterprise value of $7 billion. Starz had a market cap of $4 billion and an enterprise value of $5.1 billion.

Shares of Starz, along with those of every company in the TV networks business, have taken a beating since early August, when Walt Disney's ESPN warned of slower growth and other cable networks followed suit, the culprit being cord cutting, cord shaving and skinny bundles. The decline in share prices further fueled the notion that the industry was ripe for consolidation.

After a brief dip, Starz, though, has weathered the storm better than most of its competitors, probably because it is constantly viewed as a takeover target. Starz is slightly higher since early August while AMC is down 10 percent, Scripps Networks Interactive is down 16 percent and Discovery Communications is off 18 percent.

Lionsgate, which is a more pure content company, with movie franchises such as The Hunger Games, Divergent and The Expendables alongside TV shows such as Orange Is the New Black on Netflix and Nashville on ABC, never experienced the stock dip that afflicted so many other entertainment companies, including the large conglomerates like Disney and Viacom.

Lionsgate reported net income that rose 20 percent to $181.8 million in its most recent fiscal year despite revenue that fell 9 percent to $2.4 billion. 

Starz, which has 57.3 million subscribers to its flagship Starz cable channel and its Encore movie channel, combined, reported net income up 8 percent to $269 million in the most recent full year on revenue that fell 1 percent to $1.47 billion.