Starz wasn't John Malone's most successful investment. But it may be his most symbolic.
The media mogul once controlled Starz as an independent company. In 2016, he merged it with Lionsgate, another company he owned a piece of at the time. A year before that deal closed, Malone explained he hoped the deal would be the first of several.
"Lionsgate could buy Starz and potentially other free radicals in the industry," he said.
Written in the Starz?
By "free radicals," Malone was referring to affordable media companies, such as AMC Networks, which is controlled by the Dolan family, or A&E Networks, co-owned by Hearst and Disney, which lacked the global scale to compete with Disney and Comcast's NBCUniversal for original programming and A-list talent.
While these companies may wallow independently, banding together would give them balance sheet heft and leverage to increase programming fees on pay-TV providers.
Malone's vision never materialized. Lionsgate hasn't made another acquisition of significance since Starz and has seen its market capitalization shrink in recent years. Lionsgate's current market valuation is just over $2 billion. In 2016, Lionsgate paid $4.4 billion for Starz. Malone is no longer a Lionsgate shareholder, selling the remainder of his voting shares in 2019.
But even without Malone's influence, and even amid a transforming media and entertainment landscape, Starz may carry the torch of his vision.
In the last six years, streaming video has become the media world's north star. Pushing together companies to gain a negotiation advantage against pay-TV operators in carriage fee disputes is anachronistic as millions of Americans cancel cable each year. Investors have viewed Lionsgate as an also-ran in the streaming wars.
That's led Lionsgate's management and board to decide spinning off Starz is its best course of action. As part of the Starz spinoff, a minority stake will likely be sold to help set a market valuation for the new public company. Vivendi's Canal Plus and private equity firm Apollo Global, in tandem with streaming distributor Roku, have both made preliminary bids for a 20% stake, according to people familiar with the matter.
Starz and Lionsgate "will do great trading separately," said Jimmy Barge, Lionsgate's chief financial officer, earlier this month. "They can pursue their own initiatives, opportunities that might not otherwise arise for the combined company."
A deal could be announced as soon as Aug. 4, Lionsgate's estimated next earnings date, the people said. A spokesperson for Starz declined to comment.
As an initial valuation, based on the minority stake sale, Starz will likely be pegged somewhere between $2 billion and $4 billion, said the people, who asked not to be named because the discussions are private. In other words, Starz alone may be valued with a higher market valuation than Starz and Lionsgate combined.
A publicly traded Starz will have to get bigger to compete with Netflix, Disney, Warner Bros. Discovery, Paramount Global, NBCUniversal, Apple and Amazon in the streaming wars. Even several of those companies may not be large enough on their own.
Starz has 24.5 million global streaming subscribers. When combined with Starz's premium cable network, which competes with HBO and Showtime, it has 35.8 million subscribers worldwide. For comparison, Netflix has 222 million global subscribers.
Starz tends to focus on female and Black audiences and has had some success with shows including "Power," "Outlander" and "Gaslit," the recently released series about Watergate based on season one of the "Slow Burn" podcast, starring Sean Penn and Julia Roberts.
"Starz seems to have strong content but is struggling to attract attention," JPMorgan analyst Philip Cusick wrote in a note to clients. "This is in line with our thesis that streaming is a scale business, and we believe Starz content is better in another distributor's hands."
Lionsgate has attempted to sell Starz for years. It got fairly close in 2019, nearly striking a deal with CBS. That sale never crossed the finish line because vice chair and controlling shareholder Shari Redstone chose instead to push Viacom together with CBS. While former CBS Chief Executive Officer Joseph Ianniello had interest in acquiring Starz, Bob Bakish, the CEO of the combined ViacomCBS, now named Paramount Global, didn't share his vision, two of the people said.
Every large media company has ultimately decided not to acquire Starz. Buying a subscale streaming service with ties to the legacy pay-TV model is a hard sell for Wall Street. Investors don't want to see large media companies spending their acquisition cash on deals that don't move the needle on future growth.
That gives Starz one other path to get bigger quickly: acquire or merge with other companies, itself. Two possible targets are, once again, AMC Networks and A&E Networks. AMC Networks has a market valuation of $1.3 billion. An AMC spokesperson declined to comment on a potential merger. An A&E spokesperson didn't immediately respond for comment.
Investors may be far more sanguine on Starz and AMC Networks merging than a larger company picking off smaller rivals. Bulking up in a series of deals won't make Starz a major player overnight. But it could give it the size to acquire carve outs and divestitures from other large media companies. Over time, Starz could conceivably become a media company with enough scale to be a competitive threat. Or, at the very least, not an afterthought.
Starz CEO Jeff Hirsch hinted at this possibility in an interview with CNBC in 2020.
"You'll see these big six players, but over time they'll also start to look at their portfolio of assets and say 'ok, does this fit?'," Hirsch said. "You'll start to see assets fall out of those big six that will then constitute a new four or five that will come up. You've still got Sony, MGM, Lionsgate, AMC. John Malone has talked about putting some of these smaller dots together." (MGM has since been acquired by Amazon.)
It's possible AMC Networks and A&E will balk at selling. But they, too, find themselves as legacy holdovers — owners of cable networks with declining values. Starz could act as a sort of "horizontal acquisition machine" in the coming years to stay viable.
If you've heard that phrase before, that's because someone used to it describe his intensions in taking a stake in cable company Charter Communications back in 2013.
That person was Liberty Media Chair John Malone.
WATCH: Liberty Media Chairman John Malone on equity markets and streaming services