Lions Gate Singing Twinkle Twinkle Little Starz

When Starz (STRZA) was first spun out of Liberty Media (LMCA) back in 2013, it seemed like only a matter of time before the company was acquired. Many rationalized the spinoff as purely an attempt to get the company sold and buyout rumors always seemed to swirl around the company (and keep its price up). It didn’t happen as quickly as expected, but after years of non-stop rumors (here is just one example from earlier this year), Lions Gate (LGF) finally pulled the trigger and will acquire Starz in a deal valued at ~$4.4b. As part of the transaction, STRZA shareholders will receive $18 in cash per share and 0.63 non-voting shares of Lion’s Gate, while Starz voting shares will only get $7.23 in cash, but also receive 0.63 shares of Lion’s Gate voting shares. Apparently, the structure was done to keep leverage at the combined company down and to provide Starz shareholders with the upside in the new entity.

A common bond between the two companies is cable and spinoff legend John Malone. He is Starz’s largest shareholder and also sits on Lion’s Gate’s board of directors after orchestrating a stock swap deal in early 2015. As part of that deal, Mr. Malone acquired his board seat and a ~3% stake in Lions Gate in exchange for a ~4.5% in Starz voting shares. After that tie up, many expected the two companies to take their relationship to the next level and seek a tighter union, but apparently, poor results, concerns about the future and disputes over both valuation and voting power delayed things a bit. According to this Bloomberg piece, post-close, Lions Gate Chairman Mark Rachesky is ‘expected to be the largest shareholder in the combined company, both in voting and equity interest, with a 14 percent stake’. Interestingly, Starz’s current CEO, Chris Albrecht, recently signed a new contract through 2021 and is expected to remain part of the executive team.

There has been a lot of ink spilled on the deal with those in favor and those who question the deal’s benefits and strategic rationale. As the WSJ notes though, the premium is rather modest and the price is well below company highs set this year. FBN’s Rob Routh thinks the final price paid to Starz shareholders will be much higher once the market absorbs the strategic benefits, but so far, STRZA’s price has only come down since the announcement. This is now in the hands of merger arb players and although Starz’s stock price has come down quite a bit over the past year, the buyout price still represents another spinoff win in the John Malone universe.

Disclosure: Author is long shares of STRZA