Lionsgate Agrees To Buy Starz For $4.4B In Cash And Stock

UPDATED with quotes from conference call: It’s official: Lionsgate has agreed to pay $4.4 billion in cash and stock for Starz creating what the companies describe this morning as “a global content powerhouse positioned to capitalize on growth opportunities worldwide.”

Although the deal was long expected, the price — at about $32.73 for each Starz share — was higher than investors anticipated. Starz’ stock price is up about 12% in pre-market trading while Lionsgate is up 8.4%.

Starz CEO Chris Albrecht will continue to run the operation.

“I an thrilled to be here and to work with John (Malone) and the entire Lionsgate team and look forward to contributing in any way I can,” he told analysts on a morning conference call after the deal was announced.

In response to a question about how the deal would affect planned spending for programming, he said there would no impact on 2017 and that “it is line with what we spent in 2016.” He said he sees content creation and distribution as one of the key opportunities in the deal and sees more opportunity for the combined company as a whole.

The union will leave Lionsgate with a 16,000-title film and television library with, it says, “the largest independent television business in the world, including 87 original series on 42 U.S. networks.” The companies expect the deal to close by year-end.

Starz’ flagship platform reaches 24 million U.S. subscribers while the Starz Encore Network has 32 million subs and five streaming services.

When combined, about 60% of Lionsgate’s adjusted operating income will come from the Starz networks with 22% from Lionsgate films, 12% from Lionsgate TV, and 6% from Starz distribution.

Starz’ predictable cash flows could be especially attractive for Lionsgate. “Having just finished a difficult fiscal year, the vagaries of the film business were in full show and we believe that one of the attractions of Starz was as an anchor to a film business which has been increasingly volatile for all players,” Stifel Research’s Benjamin Mogil says.

The companies did not say this morning how the arrangement will affect Lionsgate’s interest in Epix, a premium network company run as a joint venture with Viacom and MGM.

Lionsgate CEO Jon Feltheimer told analysts that Epix is not strategic for his company and he’ll talk with the partners about “maximizing our mutual investment.”

Lionsgate Chairman Mark Rachesky says “the combination of Lionsgate and Starz brings significant scale to our portfolio of content and distribution assets and will enable us to compete successfully in today’s rapidly evolving global entertainment marketplace.”

But the deal appears to have been driven by Starz’ controlling shareholder, Liberty Media’s John Malone. He was eager to find a partner to help it compete with rivals including HBO, Showtime and Netflix.

Malone gained leverage to bring the companies together last year when he made a stock swap deal with Lionsgate. It gave the studio 14.7% of the voting shares in Starz, and Malone a 3.4% stake in Lionsgate as well as a seat on its board.

Liberty CEO Greg Maffei, who’s also Chairman of Starz, says that the combination with Lionsgate forms “an entertainment powerhouse with a world-renowned studio” that can “capitalize on content opportunities across multiple platforms.”

Like with most deals involving Malone, the exact terms are complicated. They call for each share of Lionsgate to be reclassified into 0.5 voting and 0.5 newly created non-voting shares. Each share of Starz’ Series A common stock will receive $18.00 in cash and 0.6784 of Lionsgate’s new non-voting stock based on a fixed exchange ratio.

Holders of each share of Starz Series B common stock will receive $7.26 in cash and 0.6321 of a share of Lionsgate voting stock and 0.6321 of a share of Lionsgate non-voting stock.

The companies say that they’ll be able to generate “significant revenue and cost synergies.”

Although the price for Starz was higher than the market expected recently, it “essentially values Starz where is was earlier in the year and is a material discount to peer valuations,” says Drexel Hamilton analyst Tony Wible. That “underscores the challenges/risks facing [Starz]. Furthermore, we don’t believe investors ideally want a large portion of [Lionsgate] stock as the studio’s equity value has been sliding since last year and is volatile.”



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