The cable guys had their turn. Now the production side of the entertainment industry is beginning its own consolidation phase.
John Malone and Mark Rachesky, two shrewd negotiators, finally came to an agreement on a deal that seemed to be more than a year in the making: Lions Gate Entertainment, the movie studio whose biggest shareholder is Rachesky's MHR Fund Management, on Thursday morning announced a $4.4 billion cash-and-stock acquisition of Starz, the television channel controlled by billionaire Malone. This merger follows the $3.8 billion deal struck in April by Comcast for DreamWorks Animation, the studio behind "Shrek" and also owner of AwesomenessTV.
The Lions Gate-Starz deal is no surprise and makes a ton of sense. Lions Gate's stock had dropped off a cliff going into 2016 after the company said that "The Hunger Games: Mockingjay Part 2" would be a drag on profit because it drew a smaller audience than expected. It was released right around the time of Disney's "Star Wars: The Force Awakens," which became the top-grossing movie in the U.S. and Canada, bringing in nearly $937 million in box-office sales, according to Box Office Mojo. The final "Hunger Games" film grossed about $282 million domestically. Buying Starz gives Lions Gate some revenue diversification.
Small TV networks like Starz are staring at an uncertain future in which they could get left out of the skinny-bundle packages that pay-TV providers are beginning to offer customers. And after the pay-TV giants gained more power through a series of big mergers -- Charter bought Time Warner Cable and Bright House Networks, and AT&T joined forces with DirecTV -- the content creators are seeking much-needed scale in response. In its fourth-quarter results, Starz said that network revenue slipped 1 percent "primarily due to merger-related activity at certain distributors."
The price Lions Gate is paying isn't eye-popping, but it's fair. Class A shareholders of Starz will receive $18 in cash and 0.6784 Lions Gate non-voting stock for each share held. That works out to a total of about $32.21 apiece, based on Lions Gate's closing level June 29, and represents an 18 percent premium to the 20-day average price for that series of Starz shares. Comcast's offer for DreamWorks was a more than 50 percent premium. Starz has an upcoming carriage negotiation with DirecTV, the uncertainty over which became a sticking point in the Lions Gate negotiations since it clouds the company's future valuation, my colleagues Alex Sherman and Anousha Sakoui reported. So while diversification is largely beneficial to Lions Gate, it's still taking on risk given the changing pay-TV landscape.
The next companies to keep an eye on are James Dolan-controlled AMC Networks ("The Walking Dead"), Scripps Networks (HGTV, Food Channel) and Discovery Communications (TLC, Discovery Channel). Their involvement in deals will be a matter of when, not if. In fact, AMC Networks was said to have been looking at a deal for Starz last year but had concerns about price.
There's also the chance that Shari Redstone -- the daugher of ailing billionaire Sumner Redstone, who controls CBS and Viacom -- will seek to recombine the two entertainment-media giants as she elbows her way to the top. Plus you've got technology companies and Chinese suitors taking an interest in this space. For example, billionaire Wang Jianlin is building a global entertainment powerhouse at his Dalian Wanda Group. The company is in the process of buying Legendary Entertainment, the maker of the "Dark Knight" Batman trilogy and "Godzilla." It's also trying to roll up Carmike Cinemas with the AMC theater chain it took control of in 2012. That deal, however, may need to be renegotiated as top Carmike shareholders rightfully push back on the bid price.
I wrote earlier today about how M&A overall has taken a bit of a pause (which isn't necessarily a bad thing) after most sectors caught deal fever in 2015. But the entertainment industry, living up to its name, is one that should fill any deal void this year. This is just the beginning.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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