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Could the Starz-Lions Gate Deal Get Competitive?

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Competitive deals can make your quarter

Competitive deals can make your quarter if you’re a merger arbitrage professional. If you get two companies bidding against each other, a 1% gross spread can easily become a 10% gross spread by the time everything is said and done. Recently, we saw a bidding war in the Starwood (HOT)-Marriott (MAR) deal. In fact, this deal also resembles the Salix Pharma deal where Valeant had an agreement to buy Salix under a cash tender. Endo Pharmaceuticals lobbed in a competing bid. Valeant ended up having to increase its offer to get the deal done. Arbitrageurs made about 10% gross in the course of a few weeks.

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Deal comparisons

Arbitrageurs often compare the price the acquirer is paying to the price of other deals in the same industry. This is always more of an art than a science. No two companies are alike and interest rate environments change. The best comparisons for this transaction include the following:

  • Sinclair TV of Seattle-Sinclair
  • Digital Generation-Extreme Reach
  • CORE Media Group-Apollo

In this deal, Starz is being bought for 2.5x revenues and 10.6x EBITDA (earnings before interest, tax, depreciation, and amortization). The average multiples of these three comparable deals are 1.7x revenues and 10.6x EBITDA. So, it appears that the multiples are on the high side.

Could there be a competing buyer?

CNBC reported that Starz (STRZA) ran an auction process to sell the company. This means that potential buyers were solicited by Starz’s bankers. Note that John Malone and Lions Gate (LGF) already control 43% of the vote, so it would be almost impossible for a hostile buyer to get anywhere.

Other merger arbitrage resources

For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

 

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