Lions Gate Entertainment Corp. (LGF) , the independent film and TV studio that is best known for such blockbuster hits as Hunger Games, the Twilight franchise, and Mad Men may soon become the focus of an activist fund manager looking to push it into a deal. But the scheme could come up against one of the industry's most powerful operators.
Activist fund Jana Partners LLC's Barry Rosenstein hiked his stake in Lion's Gate to about 5.7%, according to a February 16 securities filing, making the insurgent fund the third largest outside shareholder. Another fund known to shake things up, Eminence Capital LP, has a sizable stake, nearly 1%, according to a February securities filing.
And while both funds haven't made any M&A-type agitations yet, many analysts and some investors contend that Lion's Gate could be a major target for acquisition. It is one of only a handful of small, independent TV and movie studio companies with a raft of high-end properties. It's very possible it gets swept up in the current wave of consolidation in the media, telecom and technology industries.
"It's a good time to be in the TV and movie content making business," said one activist fund manager noting that the number of original U.S. TV shows has doubled to over 400.
He added that one of the most attractive aspects of a merger with Lion's Gate is that it is incorporated in Vancouver, Canada -- making it a candidate for a so-called tax inversion deal set up to avoid U.S. corporate taxes. Canadian companies also can make easier targets for activists, who only need a 5% stake to requisition a special shareholder meeting to expedite a director-election campaign.
Tony Wible, analyst at Drexel Hamilton, thinks that a major Chinese player such as Alibaba (BABA - Get Report) could be interested. A combination with a Chinese company would help Lion's Gate with promotion and distribution in the fast-growing Chinese film market.
"A Chinese player such as Alibaba would seek to mix the strategic and economic benefit of acquiring Lion's gate," Wible said. "They [China] have a broader soft-power initiative. They want to have their own version of Hollywood and would pay more to get there."
Other Chinese companies could be interested as well. Dalian Wanda Group Co. Ltd. in January acquired Burbank, Calif.-based film studio Legendary Entertainment, a deal that comes after it spent $2.6 billion to acquire AMC Entertainment Holdings Inc. in 2013.
Robert Routh, analyst at FBN Securities, thinks that Netflix Inc. (NFLX - Get Report) , which has a $39 billion market capitalization, could be interested in Lion's Gate and adding exclusive content to its growing original programming trove. "Lion's Gate is a cherry asset," Routh said.
Further, a Netflix-Lion's Gate combination could be structured as a tax inversion deal, making it all the more attractive to the U.S.-based streaming service.
There is one major stumbling block potentially in the way of these plans, however, and that is John Malone.
Any activist targeting Lion's Gate would come up against Malone, the media and telecom billionaire who is on its board and is well regarded for creating value and making smart media plays. In November, Lion's Gate firmed up its ties to Malone after Liberty Global and Discovery Communications set up a new "long-term strategic partnership" with the TV and movie studio company.
Malone owns 28.7% of Discovery and 25% of Liberty Global. Both acquired a 3.4% stake in Lion's Gate in November in a move that came after Malone himself acquired a 3.4% Lion's Gate stake in February. More recently, on February 25, Lion's Gate issued an activist securities filing in Starz noting that it "intends to explore" whether there is a potential for a "mutually beneficial combination of the two companies."
One near-term possibility is that Lion's Gate combines with Starz and Discovery Communications as a tax inversion deal. In addition to owning a near 6% of Lion's Gate, the activist, Jana Partners, also owns significant stakes in Liberty Global and Starz.
"Inversion is the key to a lot of this," said one analyst. "Malone likes to structure deals as tax efficient."
However, talk of a Starz-Lion's Gate combination has cooled after Lion's Gate shares dropped following the release of a third quarter earnings report that didn't meet Wall Street expectations in part due to disappointing results from Hunger Games: Mockingjay Part 2.
And it is still likely that bigger players like Alibaba could be interested in buying Lion's Gate even if it consolidates with other smaller media players like Starz and Discovery.
A Lion's Gate spokesman declined to comment.
Other potential buyers could include Verizon Communications Inc. or AT&T, which owns DirecTV. Routh notes that either company could be interested in buying Lion's Gate to have control over their exclusive content that it can distribute on smartphones and tablets.
"A tremendous amount of TV is consumed on smartphones," Routh said. "If you are Verizon and have exclusive content that AT&T doesn't have, you might get a consumer to switch from Verizon to AT&T."
Further, companies like Verizon or AT&T that might be wanting to enter the film and TV studio realm don't have a lot to pick from.
"You can't buy Fox or Disney with all its theme parks to get access to its film studios," Routh said. "They have a ton of content that could be very interesting for a distributor, such as if you own FIOS as Verizon does or DirecTV as AT&T does."
Under pressure from insurgent fund managers, Viacom Inc. is seeking a large minority investor in its Paramount Pictures unit, possibly Amazon.com or Alibaba. However, one activist fund following Viacom can envision a possible spinoff of Paramount, followed by an inversion combination with Lion's Gate. Another option, he added, is that Lion's Gate could take out privately held MGM Studios, which owns Metro-Goldwyn-Mayer Studios Inc., and go private.
Whether it's with Starz, Netflix or Alibaba, watch for Lion's Gate to be the central attraction in a movie-related deal down the road.