Will a Lions Gate-Starz Merger Happen?

starz-logoFour months ago, the greatest investor of all time, John Malone, arranged for a stock exchange agreement between Starz (NASDAQ: STRZA) and Lions Gate Entertainment (NYSE: LGF). The deal saw Lions Gate give 3.43% of its common stock to Malone in exchange for 4.51% of Starz common stock worth 14.5% of total voting power.
This is the endgame in a long-term plan to transform Starz from HBO’s lesser-known rival into a valuable original content provider. Starz moved into original programming way before Netflix (NASDAQ: NFLX) did, and I even suggested the move back in 2009 in another article.
At that time, Chris Albrecht had been bounced from his role as CEO of HBO for reasons having nothing to do with his performance. He had led HBO’s visionary original content productions for years. Starz snapped him up and he’s been leading the channel’s content charge for some time.
Starz had been around for years in various forms under Malone. When it became a major original content provider, as well as a distribution outlet for feature films, Malone decided it was time to spin off the network.
This is all part of a grander plan, of course. Malone is expanding his cable distribution business in the U.S. with Charter Communications (NASDAQ: CHTR), and he’s looking at buying Vodafone Group (NASDAQ: VOD), which would give him access to Western Europe.
Media distribution is great. Having original content on that distribution network makes it all the more valuable. Malone wants content for these systems, which is why a Lions Gate-Starz merger will eventually happen.
Starz is consistently profitable, with net income pretty steady at $250 million to $275 million. Most of it comes from reliable payments from subscribers. It also reliably throws off free cash to the tune of $195 million to $300 million annually. It only carries $1.17 billion in debt at an annual interest rate of about 4%.
Starz is a great start, but merging it with Lions Gate would make the situation ten times better. Lions Gate now has the second largest DVD library of any studio. It owns the “Hunger Games” and “Divergent” franchises. It produces, distributes and/or owns the TV  series “Nurse Jackie,” “Mad Men,” “The Royals,” “Nashville” and “Orange Is the New Black,” to name a few.
Lions Gate has $105 million in cash, no debt, generates operating earning between $200 million and $250 million annually, and has free cash flow of $80 million to $270 million depending on the timing of its releases.
And now … John Malone sits on its board of directors. That’s the reason for the stock swap. That’s also the reason Lions Gate and Starz are going to merge.
Malone does not do anything lightly. He is on the board so he can get inside the company’s books, operations and management, in order to determine the best way to tie the companies up.
John Malone IS media. He is a savvy investor and deal maker, and he’s way ahead of the curve. His investing track record is even better than Warren Buffett’s. That’s why I bought Lions Gate stock as soon as I heard about the stock swap deal, and I have no intention of selling.

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