Outlander
Courtesy of Starz

Lionsgate has made a formal overture to Starz to initiate acquisition talks, a year after the companies were brought together by investor John Malone.

Starz said in a regulatory filing Thursday that Lionsgate has advised that it “intends to explore whether there is a potential mutually beneficial combination of the two companies.”

The filing acknowledges what the industry has been expecting since Malone connected the two companies in February 2015 by swapping a 4.5% stake in Starz from his personal holdings in the pay TV group for a 3.4% stake in Lionsgate and a seat on the company’s board. That move was widely seen as Malone engineering a future marriage of the companies. Malone is the largest shareholder in Starz with holdings that are part of his personal portfolio and separate from his Liberty holding entities.

Lionsgate’s shares come with 14.5% of the voting power in Starz.

Starz shares rose on the news of Lionsgate’s overture. The company has a market cap of about $3.2 billion. Lionsgate and Starz are believed to have flirted with merging in the past, even before Malone played matchmaker, but valuation was said to have been a hurdle.

Starz had been part of Malone’s Liberty Media until late 2012 when it was spun off as a stand-alone public company. The group of 17 Starz and Encore-branded linear and on-demand channels has been on the block since then but has had few takers amid a time of uncertainty in the MVPD and cable programming arenas.

Malone deepened his ties to Lionsgate late last year when Discovery Communications, in which he holds a significant personal stake, and Liberty Global, the international cable unit, acquired a 6.8% stake in Lionsgate for a total of $390 million. As part of that deal, Discovery CEO David Zaslav and Liberty Global CEO Mike Fries joined the Lionsgate board.

Starz has significantly stepped up its original programming offerings in the past two years under the direction of CEO Chris Albrecht and has gained ratings traction with shows including dramas “Outlander” and “Power.” But Starz has faced an uphill climb in trying to transition from a focus on theatrical movies to original series at a time when it faces exponentially more competition than just from established rivals HBO and Starz.

Lionsgate’s film and TV production operations would be a natural fit with Starz’s need for high-end programming. However, the Starz talks raise questions about Lionsgate’s involvement in Epix, the pay TV network that it co-owns with MGM and Paramount.

The Starz group launched in 1994. It grew to become a contender against HBO and Showtime for studio theatrical output deals, but as the on-demand availability of theatrical titles expanded, Starz has shifted its focus to investing in original series. Disney and Starz ended their output contract at the end of last year (although 2015 titles including “Star Wars” will continue to air on Starz for another year). Sony Pictures is the last major Hollywood studio with a Starz deal.

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