Billionaire John Malone buys big stake in Lionsgate; Starz may benefit

John Malone, with big Lionsgate stake, might be trying to make Starz a bigger premium TV player, analysts say

Media mogul John Malone bought a significant stake in Hollywood studio Lionsgate in what could be part of a broader strategy to beef up his Starz cable network.

The billionaire, who is chairman of Liberty Media and considered an architect of the modern cable industry, will take a 3.4% interest in the Santa Monica-based studio. The transaction, which was announced Wednesday, also gives Malone a seat on Lionsgate's board.

The deal was seen by Wall Street as more than just an investment. Analysts believe that Malone might be trying to make Starz a bigger player in the premium television space, taking on juggernauts HBO and Showtime, while also facing rising competition from new digital players such as Netflix and Amazon.

"Starz has sometimes sputtered on the original content side," said Matthew Harrigan, an analyst with Wunderlich Securities. "The way things are going the importance of original content is growing and growing. This gives Lionsgate an additional conduit."

Indeed, competition among pay TV channels has increased significantly in the last few years as bigger rivals have invested significantly in original content — and that has paid off. Shows like Amazon's "Transparent" won a Golden Globe this year for best television series, while Netflix's "House of Cards" and HBO's "Game of Thrones" continue to create buzz.

Starz, which goes into about 22.5 million homes, has had only modest success launching its own shows. Its current hits are "Outlander" and "Black Sails," but those haven't made the same splash with viewers. The network, which relies heavily on movies, will be losing access to new Disney films after this year when its contract expires.

"Starz has been a little behind the curve," said Piper Jaffray analyst James Marsh, "and they're going to get more aggressive on that front."

The deal with Lionsgate could potentially give Starz access to the studio's big-budget TV productions. The studio has established itself during the last five years with some of the most provocative programs, including "Mad Men," "Orange Is the New Black" and "Nashville."

Malone, considered a savvy deal maker, might even be mulling a plan to combine the two entertainment companies, according to analysts. Lionsgate, one of the only pure-play publicly traded movie studios, has long been considered an acquisition target, and Starz was shopping itself around last year.

The deal with Lionsgate was structured as a stock swap. Malone will sell a 4.5% stake in Starz to Lionsgate, and he'll retain a 6.1% interest in the network. However, he still remains Starz's largest voting shareholder.

The pact between Lionsgate and Malone could lead to further partnerships. One scenario includes combining Starz with rival cable channel Epix, of which Lionsgate is part owner along with MGM and Viacom. Combining Epix and Starz could create a stronger competitor in the premium TV space.

Malone — worth $7.4 billion, according to Forbes — sits on the board of directors of media companies including Charter Communications and Discovery Communications. He also owns stakes of Liberty Interactive, Liberty Media and others.

In 2014, he helped spur a wave of media consolidation when Charter tried to purchase Time Warner Cable. That bid was rejected, and instead Time Warner Cable agreed to be acquired by Comcast for $45 billion, a transaction still being reviewed by federal regulators.

With Malone on its board, Lionsgate now has a pathway to an array of possible strategic opportunities across Malone's broad "family" of companies, said Piper Jaffray's Marsh.

"The guy has just got a golden touch, and this gets Lionsgate into the flow," he said.

Investors welcomed Malone's move.

Shares of Lionsgate rose the most in two years after the deal was announced, surging $2.73, or 9.2%, to close at $32.42. Starz's stock advanced $1.06, or more than 3%, to $31.76.

Any kind of broader transaction between Starz and Lionsgate could finally settle the future of the cable network.

Malone has been looking for a buyer for Starz since he spun the network off from Liberty Media in 2013. He had hoped the spinoff would streamline the network and make it more easily digestible for a media or technology company that might seek to acquire it.

Last year, Starz and its investment bankers held talks with Rupert Murdoch's 21st Century Fox, but no deal materialized. Starz has a complicated stock structure that has limited

its ability to attract new investors, and potential buyers considered it overvalued.

"Starz has always been perceived as a bit of an orphan," said Harrigan.

Lionsgate has also attracted interest. Wang Jianlin, the billionaire chairman of the Chinese conglomerate Dalian Wanda Group, held talks last year to discuss acquiring stakes in companies including Lionsgate.

Last summer, Lionsgate made an overture to Sony Corp. about a possible merger, according to emails that became public following the cyberattack against Sony Pictures Entertainment.

 

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