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John Malone’s Interests in Starz and Lionsgate Finally Aligned

UPDATED: For Starz, the long road to its $4.4 billion sale to Lionsgate this week began on Jan. 14, 2013, the day its stock began trading as a standalone entity spun off from Liberty Media.

The spinoff was designed in large part to make the company more digestible for another suitor. Liberty Media CEO and Starz chairman Greg Maffei never tried to assert otherwise.

The union of the premium cable group and Lionsgate seemed a fait accompli after the companies were linked in early 2015 by the investment maneuverings of Maffei’s boss, Liberty mogul John Malone. Now that the full-blown Starz-Lionsgate acquisition pact is inked, the deal marks an uncharacteristically big bet by Malone in the film and TV content arena, as it expands his ownership interest in Lionsgate.

With his preferred shares in Starz — Malone controls about 32% of the voting power in Starz — set to be converted into a mix of voting and non-voting shares in Lionsgate, the media magnate’s personal stake in the studio rises to about 7.5%, up from 3.4%. He took a seat on the Lionsgate board last year along with the CEOs of two Malone-affiliated companies, Liberty Global’s Mike Fries and Discovery Communications’ David Zaslav.

Although Lionsgate was the obvious suitor, the fact that Malone has interests on both sides of the deal — through his Starz holdings and as a board member of Lionsgate — made it important that the sale process involve discussions with third-parties in order to set a market price for the premium cabler.

In a Securities and Exchange Commission filing released Friday, Lionsgate disclosed that the deal includes breakup fees of $150 million, $175 million and $250 million, depending on the reasons for calling off the wedding. Lionsgate would have to pay Starz $250 million if it cannot secure the debt financing for the deal. The transaction is projected to close by Dec. 31, but that date can be extended to March 31 if there is a delay in receiving regulatory approvals.

During the past 18 months, Starz got serious in deal talks with CBS, most recently as February. Talks with AMC Networks and AT&T never got as far down the road, but both companies were in the mix at one point. The dealmaker charged with shuttle diplomacy on behalf of Malone and Starz was Aryeh Bourkoff of LionTree Advisors. Malone has kept his banker of choice busy of late with the Charter/Time Warner Cable/Bright House Networks acquisition and now Lionsgate-Starz.

AT&T’s interest in Starz was notable because the parent company of DirecTV has a big carriage renewal deal coming up later this year with the premium cable group.

With about 26 million subscribers between DirecTV and U-Verse, AT&T is the nation’s largest MVPD, which means the pact is crucial to Starz’s bottom line. The previous deal was valued at about $350 million a year, according to industry sources. Starz undeniably has more momentum with original programming than it did four years ago when the last deal was struck. But AT&T may want to flex its newfound muscle and force a haircut or less advantageous terms on Starz. There was chatter in the biz on Thursday that the outcome of the DirecTV carriage negotiations could impact the ultimate purchase prize for Starz.

Another big question raised by the Lionsgate-Starz nuptials is the long-term plan for Chris Albrecht. He is sure to realize a windfall from the sale thanks to his personal holdings in Starz. In discussing the deal on Thursday, Albrecht and Lionsgate CEO Jon Feltheimer voiced enthusiasm for Starz continuing to operate autonomously with Albrecht and his team at the helm. At the same time, Albrecht will have “major participation in the leadership of the entire combined company,” Feltheimer told investors Thursday.

Starz announced a new four-and-a-half-year employment contract with Albrecht on Monday, which was a clear signal that the acquisition pact was zooming to completion 48 hours later. The fine print on Albrecht’s deal, as disclosed in a Securities and Exchange Commission filing, is that it has to be renewed on a yearly basis through 2020, meaning that both Albrecht and Lionsgate have an easy out, if need be. It also stipulates that he cannot be fired without cause between today and Jan. 7, 2017 — the time frame in which the acquisition is expected to close.

Sources familiar with Albrecht say he is engaged and wants to see Starz continue through its transformation into an original content engine. Starz has a slew of new series in the hopper for the next 18 months, including the high-profile drama “American Gods,” the J.K. Simmons-starrer “Counterpart” and Alejandro Gonzalez Inarritu’s magical realism vehicle “The One Percent.”

The entrance of Starz into the Lionsgate realm also raises big questions about the future of Epix, the pay TV partnership of Lionsgate, Viacom and MGM. Lionsgate’s feature film output through its main imprint is committed at present to Epix through at least 2021, but Feltheimer was clear in his comments Thursday that Epix is no longer a priority for the company. Viacom owns the largest share of Epix at 49% while Lionsgate has a 31% stake and MGM owns the remainder.

“The fact of the matter is that at 31%, Epix is not truly a strategic platform for us and I think our partners over there have known about the possibility of this transaction for some time,” Feltheimer told investors.

Any movement on the Epix partnership — such as Viacom and MGM buying out Lionsgate or even Lionsgate buying out the other two and merging it with Starz — is likely to be held up by the larger corporate drama engulfing Viacom. Viacom CEO Philippe Dauman is wrapped up in a intense legal battle with Viacom controlling shareholder Sumner Redstone and his daughter Shari Redstone. As such, the fate of Epix is undoubtedly a low priority for Dauman at present.

In the meantime, while the dealmakers work to close the Lionsgate-Starz transaction, biz watchers will be keeping an eye on Malone and other logical acquisition targets (think AMC Networks, Discovery Communications, Scripps Networks Interactive, even possibly CBS Corp.) to see if Starz-Lionsgate deal is the first domino to fall in the content consolidation push that Malone predicted as inevitable last year.

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