Lionsgate And Starz Shares Pop On Report Of Renewed Merger Talks

Lionsgate and Starz appear to be talking again about getting together. The studio’s share price rose 5.8% today, while the premium cable network is up 5.5%, after The Street reported that the companies have renewed their merger discussions.

Starz said in an SEC filing in February that Lionsgate “intends to explore whether there is a potential mutually beneficial combination of the two companies.”

That provided a boost for Starz shares. Its investors — including Liberty Media’s John Malone, its controlling shareholder — have been eager to see it find a partner to help it compete with rivals including HBO, Showtime and Netflix.

Lionsgate already owns 14.7% of the voting shares in Starz following a stock swap early last year with Malone. That deal gave him a 3.4% stake in Lionsgate and a seat on its board. Lionsgate also is a part owner of Epix, a three-way joint venture with Viacom and MGM.

But Lionsgate’s negotiations with Starz quickly ran aground when the studio released an earnings report for the last three months of 2015 that fell far short of Wall Street’s expectations, due in part to disappointing results for The Hunger Games: Mockingjay, Part 2.

Since then, Lionsgate shares have appreciated 17.5%, while Starz’s are up 20.4%.

Early this month Starz CEO Chris Albrecht told an investor gathering that while he wouldn’t “predict any particular occurrence” he expected to see “more activity in the M&A space.”

He joked that “there’s only one CEO of a company, which is often one of the problems of putting these companies together. I, on the other hand, am very easy. You want me to stay? Pay me. You want me to go home? Pay me.”

Many investors believe that a union makes sense.

Starz could use a dependable content provider. It’s betting heavily on original programming, especially following the expiration this year of its movie distribution deal with Disney.

A deal also might give Lionsgate a sure outlet for its programming. ItsTV productions include Orange is the New Black, Mad Men, Weeds and Nurse Jackie.

“A Lionsgate deal continues to be the most logical and probable transaction” for Starz, Macquarie Securities’ Amy Yong said last week.

But Morgan Stanley’s Ryan Fiftal’s says that, although he doesn’t rule out a transaction, he’s “less bullish” after the Treasury Department adopted rules to deter U.S. companies from merging into foreign ones to take advantage of other countries’ lower corporate tax rates. That could affect Lionsgate, which is incorporated in Canada.

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