John Malone Might End Up With A Bigger Stake In Lionsgate

EXCLUSIVE: Liberty Media Chairman John Malone sees Lionsgate as a major content play for his media empire and is poised to become progressively more involved in the company following a stock deal this month that also put him on its board. Sources say if all goes well, he is likely to increase his stake in the studio. Lionsgate swapped about $150 million worth of its shares for a stake in Malone-controlled Starz, an arrangement designed to help the two sides get to know each other. Under the deal, the studio is well positioned to take advantage of Malone’s global ecosystem that includes Discovery, Charter Communications and Liberty Global — the largest international cable operator.

Starz CEO Chris Albrecht hinted as much today in a conference call to to discuss his company’s Q4 earnings when an analyst asked about what he called “the elephant in the room”: Malone’s deal with Lionsgate.

“The people who have reported that he has a new and growing appreciation of content are seeing some of the things I’m seeing,” Albrecht said. When Malone makes a deal like this, “he sets a lot of energy in motion.” And while Starz and Lionsgate have been “good working partners,” the new arrangement makes them cousins. “Maybe we’ll be kissing cousins, I don’t know. … John Malone has an idea in his head and didn’t do this because he didn’t have anything else to do.”

One banker predicts that Malone will pounce. The one-time king of cable “is strategic in how he structures his investments and clearly sees this as a stepping stone to something bigger.”

How far will they go? Not clear. Lionsgate’s one of the few publicly traded independent studios — and on everybody’s list of potential acquisition targets. But Malone has long been cool on investments in Hollywood, which has been too hit-driven for his tastes.

That still leaves a lot of room for them to collaborate. For example, Starz wants to improve its line up of theatrical movies and original TV series;

Lionsgate produces both. Its show Mad Men put AMC on the map. Lionsgate has built a powerhouse television division with other successful programs including Orange Is The New Black, Nurse Jackie, Weeds, Wendy Williams, House Of Payne and Anger Management. The studio has been talking about developing a TV spinoff of its 2004 feature film Lord Of War.

In addition to ordinary licensing deals, an alliance with Malone could help Lionsgate to create global streaming services for its content. That’s clearly a priority, as it demonstrated last year when it launched Lionsgate Entertainment World, a streaming service in China forged in a partnership with e-commerce giant Alibaba.

Those who know Malone well say he’s also eager to find a home for Starz. Liberty spun off the premium cable channel at the beginning of 2013, in part to help see whether a larger entity might buy it. Malone still controls 45.5% of its voting shares.

But the Street’s enthusiasm for Starz cooled last year as it became clear nobody was willing to pay the kind of price that Malone and others wanted. In addition to its namesake channel, Starz owns Encore and Movieplex. They face intensifying competition from other premium channels including HBO and Showtime, as well as online powers led by Netflix and Amazon. And in 2016 Disney will shift its new productions to Netflix, though Albrecht says that will free money and airtime for potentially lucrative originals.

During the past 12 months, Starz shares appreciated a mere 3.7% — well below the benchmark Standard & Poor’s 500 at +14.7%. The company currently has a market value of $3.4 billion, and more than $1.17 billion in debt. Starz’s net income in 2014 increased 9.7% to $271.3 million on revenues of $1.66 billion, down 6.4%.

Wall Street also would be glad to see Lionsgate secure a sure landing place for its shows. Revenues from TV orders help to even out earnings. That’s an issue for Lionsgate; some analysts worry that profits will fall off a so-called “Hunger Games cliff” next year after the blockbuster movie series ends.

What about EPIX — in which Lionsgate owns a 31.2% state as part of a joint venture with

Viacom and MGM? A connection with Starz could pay off for both of the services, still widely considered runners-up in the competition with other premium pay TV services. (EPIX has about 10 million subscribers, while Starz has 23.3 million and its sibling Encore has 34 million.) For example, the owners might decide to join forces or simply focus each channel’s mission — perhaps establishing EPIX as a home for theatrical movies and Starz as a venue for TV series.

No discussion about a Malone deal would be complete without a mention of taxes — which he famously hates to pay. And Lionsgate has something valuable to offer, under the right terms. Since it is incorporated in Canada, a deal with Starz could lower its tax rate from the 34% it paid in 2014 to about 26%.

But nothing is certain. After listening to Albrecht today, “we come away unsure of the actual or any real benefits for Starz,” Stifel analyst Benjamin Mogil says. “Lionsgate has provided originals for Starz in the past, notably Boss.” And since Lionsgate has a bigger stake in EPIX, its “bias is likely towards delivery towards that channel. Longer-term, there could be a jigsaw puzzle which has Lionsgate and Starz as larger parts of a Liberty integrated content/distribution entity, but in the here-and-now we see the status quo as likely sticking.”

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