Why Lionsgate Entertainment and Starz Soared This Morning

Image source: Lionsgate Entertainment.

What: Shares of Lionsgate Entertainment rose as much as 11.6% in Thursday's early trading. Starz (NASDAQ: STRZB) shares peaked at gains of 14.7% for the non-voting Series A stock and 18.9% for voting Series B shares. The two companies have been trading love notes for more than a year, and have finally decided to consummate a long-rumored merger.

So what: Technically, Lionsgate is buying Starz in a cash-plus-stock deal valuing the target company at $4.4 billion. Approved by the boards of both Starz and Lionsgate, this agreement is expected to close in December 2016.

Lionsgate will fund the cash portion of the deal with new debt papers, but strong cash flows should allow the merged company to pay those loans back quickly. The deal will also result in a new class of Lionsgate shares, to match the pair of voting and non-voting classes of Starz stock. If (and only if) you could vote in Starz's or Lionsgate's annual meetings, you'll be able to take part in the merged company's votes, too.

Although all three shares soared on the news, they're still trading in negative territory year to date and have trailed the S&P 500 market index since merger rumors started in February 2015.

LGF data by YCharts

Now what: This deal puts Starz's premium cable assets together with Lionsgate's own cable production portfolio and big-screen movie studio. Each company generates annual free cash flows near $1 billion today, and that tally should rise as the merger enables both economies of scale and cost-cutting opportunities.

Shareholders and regulators will still have their say, but this merger makes too much sense to go off the rails now. It's still unclear whether the merged company will take over Lionsgate's Santa Monica headquarters or the Starz complex in Englewood, Colorado. I'm assuming that the company will stick with the Lionsgate brand name and most of that company's management team -- but I could be wrong.

Stay tuned for further detail. Both management teams are likely to share further details when they report earnings in August. Those earnings calls should be interesting indeed.

The article Why Lionsgate Entertainment and Starz Soared This Morning originally appeared on Fool.com.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Lionsgate Entertainment. The Motley Fool also recommends Starz. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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