What's Next for Lionsgate After Discovery, Liberty Global Take Stakes?

John Malone - H 2015
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John Malone - H 2015

Analysts are bullish on likely content consolidation with John Malone entities; Lionsgate shares gained 4 percent Tuesday on very heavy volume.

John Malone certainly knows how to fuel speculation.

On Tuesday, the billionaire who owns 29 percent of Discovery Communications and 25 percent of Liberty Global said each of those two conglomerates have purchased a 3.4 percent stake in Lionsgate Entertainment, in addition to the 3 percent Malone already held, and analysts en masse weighed in on what the move might foreshadow.

Some predict an outright acquisition in the future — perhaps a merger with Starz, also a company in which Malone is heavily invested — while others noted the more obvious content and distribution synergies, or perhaps it's a move toward the creation of another online service.

"‎One of our key themes behind our 'buy' rating on Lionsgate has been the attractiveness of content companies in an age of increased distribution and the need for more original content," Stifel Nicolaus analyst Benjamin Mogil wrote in a note after the announcement.

Mostly, Wall Street appears bullish on the deal, with Lionsgate shares moving 4 percent higher on five times normal volume, an impressive accomplishment considering the news came just after the company reported lackluster earnings. Discovery was up 4 percent Tuesday, as well, and Liberty Global was up 1 percent.

Tellingly, Starz also moved 2 percent higher on more-than-average volume even though the TV-network company isn't mentioned in the Lionsgate-Discovery-Liberty announcement.

And, it shouldn't be forgotten that Starz has owned a chunk of Lionsgate since February, when Malone traded shares of Starz for shares of Lionsgate, a move that got him a board seat at Lionsgate.

In fact in March, Starz CEO Chris Albrecht was asked straight up if Starz might merge with Lionsgate, and he responded with: "It certainly remains to be seen." 

FBR & Co. analyst Barton Crockett said the path to consolidation between Lionsgate and a company partially controlled by Malone could well come with chairman Mark Rachesky selling his remaining 20 percent in the studio to Malone affiliates, after having already sold partial stakes to Discovery and Liberty Global.

"We suspect that part of the appeal to the Malone entities of owning Lionsgate is that Lionsgate can provide more content to distribution platforms like Discovery, Liberty Global and Starz, or that content from all of these companies could be bundled into some kind of online offer," said Crockett.

The deal has Discovery CEO David Zaslav and Liberty Global president and CEO Michael Fries joining the Lionsgate boardroom while Malone's influence also grows at Lionsgate. Analysts were also noting the mogul has interests in the cable pipelines that deliver the content created by Lionsgate, Liberty, Discovery and Starz, including Charter Communications, which is acquiring Time Warner Cable.

"Malone has broadly mentioned that the free radicals in media should partner up. I think Lionsgate could be his vehicle to consolidate the industry similar to Charter," Macquarie Securities analyst Amy Yong said Tuesday.

For Piper Jaffray analyst James Marsh, Malone's latest stock purchases signal more partners likely to come for Lionsgate. "We see a number of ways the companies can work together. Liberty could push for new OTT offerings, might be interested in library deals, potentially starting new channels," Marsh wrote in his note.

Marsh also noted that Discovery's reality-type programming doesn't mesh with Lionsgate's scripted TV programming, so Malone's move could signal that a tweak could come to Discovery's lineup. Discovery, he said, will also benefit by being able to more easily expand overseas, given the international footprint enjoyed by Liberty Global.