Lionsgate said in a Securities and Exchange Commission filing that it intends to inform premium pay TV channel Starz that it is exploring a possible combination between the two, confirming speculation that has swirled around the companies since Liberty Media chairman John Malone first invested in the movie studio last year.
Despite the prospect of a merger, Lionsgate stock plunged more than 13% ($3.46 per share) to $21.99 each in early trading Friday after reporting disappointing fiscal third quarter results. The studio missed consensus revenue targets by almost $100 million and earnings per share at 26 cents were almost half the expectation of 46 cents per share.
Starz shares were down a modest 1.2% (36 cents each) to $30.87 per share in early trading.
In the SEC filing, Lionsgate said it has informed Starz that it “intends to explore whether there is a potential mutually beneficial combination of the two companies,” the studio said in the SEC filing. There is no guarantee that a deal will be consummated.
Starz and Lionsgate have been in talks before, but they have generally broken down over price. Speculation heated up about a year ago when Liberty chairman and major Starz shareholder John Malone swapped a 3.4% interest in Starz for 4.5% of Lionsgate stock. In November, Malone holdings Discovery Communications and Liberty Global each agreed to purchase 3.4% Lionsgate stakes.
It is no secret that Malone wants Starz to find a buyer – in 2012 he said the channel needed a “big brother.” A Starz-Lionsgate marriage would give the studio an additional outlet for its movie and TV content and Starz another source of high-quality original content. The studio, which has produced box office hits like The Hunger Games and TV shows like Orange is the New Black, Nurse Jackie and Mad Men, also is a partner in premium service Epix.
In a research note, Morgan Stanley media analyst Ben Swinburne wrote that tax implications which expired this year may have been an impediment to a deal in the past. He added that a combination would benefit Lionsgate by giving the studio a steady stream of cash flows, reducing the volatility inherent in independent film companies.
“Secondarily, Starz / Encore would provide LGF dedicated shelf space for high-end TV content, incrementally reducing TV production risk,” he wrote.