Where Do Lionsgate And John Malone Go From Here?

With any luck, Liberty Media chairman John Malone will be in an expansive mood on Thursday when he meets with his investors and talks about the future of his relationship with Lionsgate.

Just about everyone in the business is wondering about this, especially today. Malone effectively controls 9.8% of the studio when you add the 3% he picked up in February with the 3.4% that Discovery and Liberty Global each bought in a deal announced this morning. (He’s the dominant shareholder in both companies.)

But it’s difficult to draw a straight line from where Malone and Lionsgate are now to the much closer relationship that each seems to want. Any action they take would also result in a reaction affecting taxes (a huge concern for Malone), other alliances, and Charter Communications’ $67 billion transactions to buy Time Warner Cable and Bright House Networks.

The smart money is betting that Malone and Lionsgate will move slowly — with the next goal to bring Starz, which he controls, more closely into the studio’s orbit.

“I think he might want to take [Lionsgate] over at some point,” one media mogul tells us. “I think what he is doing now is making the alignments and trying to figure out what to do with Starz. Eventually, you’ll probably see Lionsgate’s library move over to Starz. Aligning like this with Lionsgate gives him more information and more influence but not a coercive influence. It gives him insight and optionality. I truly believe that he’s trying to figure out the puzzle pieces himself. He likes to be involved in a little bit of everything.”

Still, Malone’s unafraid to make big, surprising deals. Let’s look at some of the most widely discussed options:

Liberty buys or merges with Lionsgate: Malone is a consolidator. Entities he controls have major stakes in Discovery, Starz, Live Nation, and SiriusXM. And he sees an opportunity to do much more with content as the pay TV bundle begins to break apart, and digital companies including Netflix begin to challenge traditional cable and satellite companies.

Plainly put, Malone believes the cable guys blew an opportunity to control online viewing — leaving the field open for Netflix. He’d like to change that.

So there’s a logic for teaming with Lionsgate. Its TV and movie library and production skills — as well as its investments in Epix, digital producer Defy Media, and Pop (formerly TV Guide Network, now a JV with CBS) — could complement his current holdings.

If he wants to buy (and Lionsgate wants to sell) then Malone shouldn’t have a problem rounding up cash. He’s accustomed to making far bigger deals than it would take to snap up Lionsgate, which has a market value of $5.7 billion.

Besides, since Lionsgate is incorporated in British Columbia, a deal that makes it the surviving company would help Malone to cut his annual tax payments by switching to Canada’s low-teen corporate rate. That would delight the mogul who has spent so much of his career devising complicated strategies to avoid paying taxes.

But this would be an awkward time to go all the way with Lionsgate: A straight-up combination likely would ring alarm bells at the FCC and for antitrust officials at the Justice Department as they review Charter’s effort to become the No. 2 cable operator.

Malone’s Liberty Broadband is Charter’s No. 1 backer with 25.8% of the voting shares. If Malone also controlled Lionsgate then it might exacerbate regulators’ concerns about whether Charter could treat all content owners fairly on its TV and broadband lines.

Comcast scrapped its plan to buy TWC in April after the feds opposed the deal. They feared that the owner of NBCUniversal would have too many conflicts of interest.

Charter has gone to great lengths to argue that it doesn’t have the same problems. Yet last month, Malone breezily said in a public interview that he likes the idea of investing in different companies and “coordinate their behavior when I can.”

BTIG’s Richard Greenfield says he was “surprised to hear Malone speak so frankly … the question becomes will regulators care and if they do, are there ways to protect consumers from these risks through consent decree behavioral conditions” considered insufficient for Comcast.

The FCC’s already on this. It just sent letters to Liberty Media, Liberty Interactive (which owns QVC), and Liberty Broadband (which has his Charter shares) looking for information about Malone’s programming power and plans.

Lionsgate buys Starz. Malone, who controls 47.2% of Starz’s voting shares, speaks openly about this possibility. It’s easy to see why.

The companies are already entangled. Malone’s stock swap transaction with Lionsgate early this year gave the studio 14.7% of the voting shares of Starz. The premium network company owns 3.43% of Lionsgate.

And Malone, as well as many Starz watchers, want to see something happen. Several execs and analysts warn that it will be the odd-man out in the competition with HBO and Showtime unless it’s allied with a bigger, and stronger, entity — especially a content creator.

It’s unclear whether CEO Chris Albrecht can make good on his vow to fill his schedule with attractive original productions and series. He has a lot riding on them as Starz prepares to lose Disney’s movies at the end of this year when Netflix picks up the studio’s new releases in the premium cable window.

Meanwhile, Starz stands to suffer if cable and satellite companies can’t slow or reverse the pace of cord-cutting. Subscriptions in Q3 fell by 1.8% vs the previous quarter to 55.8 million for Starz and Encore combined.

Starz also may not be strong enough to match HBO and Showtime’s ability to reach consumers directly via online services. Albrecht said last month that “in the coming weeks we plan to complete agreements with several new distribution partners” outside the traditional pay TV providers.

A strong connection with Lionsgate would help Starz. The problem? Lionsgate already has a premium network alliance with Epix. It invested $80.4 million through 2010 and owns 31.2% as part of a joint venture with Viacom and MGM.

No wonder Lionsgate CEO Jon Feltheimer recoiled today when an analyst asked him what he thinks about a deal with Starz — which could be seen as an Epix competitor. “I’m not going to talk about Starz in any way connected to M&A,” he said.

The CEO added that Starz “has a great future. But honestly, that doesn’t really mean anything in terms of what we’re going to do other than we love producing shows for Chris. We’re talking about a number of other strategic things together, and really that’s all I’m going to say right now.”

Just wait. Investors are content with Lionsgate for now. The stock is up about 25% so far in 2015.

The film unit is developing more Divergent installments, Now You See Me 2, Gods Of Egypt, and John Wick 2 and looking for other franchise plays. The television operation is working with Twilight author Stephenie Meyer, and series including Orange Is The New Black and Nashville.

There’ll be additional orders as a result of today’s deals with Discovery and Liberty Global. Lionsgate also has digital initiatives, and even plans Hunger Games theme parks.

Meanwhile Malone does … well, whatever he wants. And he can benefit by letting his relationship with Lionsgate simmer for a while.

With his seat on Lionsgate board, he can learn from the inside how a modern movie and scripted content business works. The studio also has to take his wishes seriously, especially now that he’s joined by two close allies: Discovery CEO David Zaslav and Liberty Global’s Michael Fries.

Meanwhile, Charter’s deal with TWC can take its course in Washington. Charter CEO Tom Rutledge recently said that he expects the transaction to close in the first quarter of 2016.

Malone and Lionsgate can learn a lot about each other, and what they can do with their relationship, between now and then.