Lions Gate Entertainment Corp.’s $4.4 billion deal to acquire TV network Starz, set to close by the end of the year, brings John Malone and a broad audience into its fold, but will taxes, debt, and competitive pressure weigh on the deal, which was approved by the federal government Aug. 1?
4 ways the deal could bode well for Lions gate
1. Financial synergies.
The deal will see a Lions Gate subsidiary merge with Starz into one company, which will then be subsumed by parent company Lions Gate. The combined entity would hold a 16,000-title film and TV library. In a filing with the Securities and Exchange Commission, the companies said the deal will result in savings of $50 million annually by getting rid of redundancies and gaining efficiencies from economies of scale in production, manufacturing, and marketing. The merger will give the combined company an average cash tax savings of more than $150 million each year through 2021. Going forward, Lions Gate said the parent company would invest $1.8 billion in new content a year. Meanwhile, it will have access to Starz’s television budget, which hit $207 million in terms of production and programming acquisitions last year, according to its most recent annual report.
2. Better together.
The combined company will be able to “combine the production capabilities of Lions Gate and the distribution of Starz,” said Steven Cahall, an analyst at RBC Capital Markets in New York. For example, Lions Gate could sell its popular television show “Orange Is the New Black” to Starz, which could in turn increase Starz subscription numbers. Depending on the arrangement, Lions Gate could later sell the international rights to another distribution platform.
3. Steady income.
“Lions Gate’s movie-driven business can be quite volatile,” Cahall said. “This adds a more stable earnings business.” Starz subscriptions will serve as a steady revenue stream for the studio. According to Starz’s website, the Starz channel has 24 million subscribers and sister channel Starz Encore has 32 million.
4. John Malone.
The billionaire media mogul is Starz’s largest shareholder. His holdings in Silver Spring, Md.-based mass media and entertainment company Discovery Communications Inc. and London’s Liberty Global, the world’s largest international TV and broadband company, could benefit Lions Gate, said Amy Yong, an analyst at Macquarie in New York. “Now Lions Gate is privy to those relationships,” said Yong. “They can share tech know-how and perhaps additional partnerships.”
4 challenges the deal could pose for Lions gate
1. Ball and chain.
Until now, Lions Gate, led by Chief Executive Jon Feltheimer, has used a wide variety of distributors for its content, including Home Box Office, Netflix, Showtime and ABC Family, among others. “The question investors have is if Lions Gate has a very good television show, is it better off selling it to Starz or a competitor, particularly if an external buyer offers a better price?” said Cahall. “As a shareholder, you want it shopped around to the highest bidder.”
2. The taxman.
Although Lions Gate has its U.S. headquarters in Santa Monica, the company is incorporated in Vancouver, British Columbia. The company notes in an SEC filing that the IRS might consider the new company a U.S. corporation, which would subject it to a “substantial additional U.S. tax liability.” In that case, Lions Gate shareholders outside the United States would be subject to withholding tax on the gross amount of any dividends from Lions Gate. Regardless, the company will still have to pay Canadian taxes, so it might be on the hook twice, which it said “could have a material adverse effect on its financial condition and results of operations.”
3. Changing laws.
Companies moving outside the United States for the purpose of dodging taxes have become a hot political topic. Even if the IRS doesn’t label the new company a U.S. corporation, new laws could be passed that could make it a target. Both Republican presidential candidate Donald Trump and Democratic candidate Hillary Clinton have said they would seek to stop corporate inversions if elected.
In order to meet the $4.4 billion price tag, Lions Gate will be taking on a considerable amount of debt from Bank of America, Merrill Lynch, and others, in addition to the approximately $890 million in corporate debt and $690 million in production loan obligations it had as of March 31, according to the SEC filing. The company has a debt commitment letter from a group of financial institutions for various types of loans totaling $3.6 billion and a $1 billion line of credit for the merger, according to the filing.
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