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Summary of Lionsgate Acquisition Announcement of Starz

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Disclaimer: The following is based on public reports on the acquisition, some personal experience and opinion.

The deal, valued at $4.4B in stock and cash was announced just before Wall street opened for business and at the very end of the second quarter.  I bet the financial and strategy types were burning the midnight oil this month.  What the headline doesn’t say is that they had to refinance debt of both companies to raise the cash.  Lionsgate (LGF) was in a bit of trouble financially this year.

The stock prices closed up 6% for Starz and down 3.3% for LGF.  This is not unexpected, often the buying company sees a decline in stock due to either the impact on their balance sheet (loss of cash or increase of debt) or because Wall Street thinks they paid too much.  After hours trading helped erase some of that loss.  Stock prices reflect investors’ opinions on what this means for the future of the company, so there is some modest optimism for Starz.

Why did they do this?  Content and content delivery is king. People consume content in so many ways now, and so media consolidation is happening so that the two companies can diversify and shore up their weaknesses. It’s the reason for the Comcast and Dreamworks deal.  3-4 years ago, in a meeting with a major media player, they said that the Comcasts of the world would go under if they did not change their model.  (I wasn’t there but an SVP of Marketing at the time relayed this story to us.)

LGF is fairly young, formed in 1997.  They have had some success with Twilight, Hunger Games, Mad Men, Orange is the New Black, etc., but they had some major bombs this year.  They need help diversifying that content with something profitable and reliable, and Starz with sustained successes in its premium original programming offers that.  With MadMen being off the air, LGF lost some of that cushion.

Starz could not make it as just a distributor of movie content, especially after their major film studio deals, most recently Disney.  They could not compete with HBO due to sheer size, and the fact that HBO often comes with expanded cable packages but Starz is an add-on.  Chris Albrecht’s transition of the company to original programming has been their saving grace.  First they captured the male audience and then with Outlander, the female one.

When you put a company up for sale, you create a major document called an Information Memorandum.  It contains anything from the current business plan to strategic plan (usually 3-5 years out), financials, etc.  It describes their assets which in this case are its studio contracts, intellectual property, licensing deals, studios,  programs, etc.  Even actors under contract are considered an asset as are to a lesser extent social media followers, although obviously these are harder to quantify than other more tangible assets.  When an acquiring company is reviewing the information memorandum, you don’t want anything to change with the assets that influences stock price or financial projections (unless it gets better, but you really want stability during this time).

So is this a good deal?  I read a lot this evening, but so far there aren’t any in-depth analyses that weren’t all saying the same thing.

PROS

  • The reasons I gave above
  • Tax break as LGF originated in Canada
  • Expands distribution for both
  • Available original content extends the brand
  • Lionsgate knows how to work the Emmy system, 215 nominations/32 wins and considering that film is their first asset, that’s pretty good
  • Grows subscribers to 66M
  • They plan on investing $1B in TV content in the next year

CONS

  • Some bad leadership decisions by LGF
  • Starz can’t distribute their movies right away; LGF still has a deal with Epix unless they divest them.
  • John Malone has way too much power now
  • LGF has had financial trouble, will they be stingy with budgets
  • This may not be over; there is talk about them merging with another film studio like Paramount or Sony, but that’s more what if talk at this point from analysts

I found it interesting that LFG listed a strong benefit of the acquisition that Starz could utilize LGF marketing expertise and relationships.  I’m going to dig through Advertising Age to see if I can find who does their ads.

Chris Albrecht cannot be terminated without Cause for 18 months but I think this is a stay-pay  arrangement to ensure continuity and stability, which shareholders will be seeking.

So, what does this mean for OL

Outlander was spotlighted in 2 of the 13 slides presented at the press conference.  It is seen as very strategic to the acquisition.

The New York Times and the Wall Street Journal used a picture of Jamie and Claire as the headline shot to their article on the acquisition.  That means it is seen as a brand identifier for Starz.  This is also a good thing.

Once Starz can show MadMen, etc., think of the new eyes on Outlander, which can only increase interest.

I think that the new company will protect this asset and was likely one of the reasons Starz was seen as attractive.  I’m curious as to what it might mean for Tall Ships as their deal is with Sony.  I could find nothing that said Sony lost any of its rights in either international distribution or merchandising.

The deal is expected to close before the end of the year; I wouldn’t anticipate any government push back or SEC concerns.   We will follow this closely and update the story as the deal moves toward close.

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