Canada Pension Plan Investment Board, Toronto, has filed a suit against Lions Gate Entertainment Corp. in order to prohibit the film and television production company from spinning off Starz, its poorly performing cable channel and streaming service.
The suit, filed on Aug. 27 in the Supreme Court of the State Of New York, alleges that Lions Gate violated terms and obligations of a $1 billion note issued in April 2021 to investors — including CPP Investments — in an effort to enable the company to transfer its successful studio segment to a special purpose acquisition company and separate Starz.
Specifically, the suit claims that Lions Gate made certain amendments that granted a group of “favored noteholders” more attractive terms in a new note in order to compel these noteholders into agreeing to terms that will make it easier to separate Starz.
The new notes would ultimately have a 6% coupon, while the existing notes had a coupon of 5.5%, the suit stated. The new notes do not mature until April 2030, while the existing notes are set to mature in 2029.
CPP Investments indicated in its filing that a decade ago Lions Gate Entertainment was “riding high” and “generating billions in revenues and basking in the glow of its soaring stock price.” The studio was best known for the hugely popular "Hunger Games" and the "Twilight Saga" movie franchises.
The suit alleged that in June 2016, Lions Gate made a “major strategic blunder” by purchasing Starz for $4.4 billion. “Despite the heavy sticker price it paid, Lions Gate has never even come close to realizing the sort of profit it was hoping to get from Starz,” the suit stated. “By 2022, Lions Gate Entertainment’s stock price had fallen to new record lows. Lions Gate pinned at least part of the blame for this deterioration on Starz. In a desperate bid to turn things around, Lions Gate resolved to separate its more profitable television and movie studio business segments, along with its film and television libraries, from the unprofitable Starz segment.”
In late 2023, the suit noted, Lions Gate said it planned to transfer its studio business to a publicly traded special purpose acquisition corporation. However, CPP Investments contends, such a transaction would violate the terms of the indenture that governs the notes it originally issued in 2021.
“The indenture contains numerous express rights and protections in favor of noteholders like CPP Investments — rights and protections that CPP Investments expressly relied upon when purchasing the notes in question — that would restrict any sale, spin, or separation of Lions Gate’s other business lines from Starz,” CPP Investments stated.
As a result, CPP Investments alleges in the suit, Lions Gate Entertainment “conspired with a handful of its most favored lenders in an end-run around the indenture that consisted of a so-called exchange transaction with those favored noteholders” in return for their agreeing to strip out certain “bothersome restrictions” in the notes. Specifically, Lions Gate Entertainment offered to redeem the notes held by these favored noteholders in return for new notes that were “superior in all material respects.”
CPP Investments seeks to, among other things, invalidate amendments in the notes and order Lions Gate to pay all principal, premium and interest (including default interest) amounts owed to CPP Investments under its notes.
As of the filing date, CPP Investments held more than 28% of the currently outstanding notes. CPP Investments had C$646.8 billion ($472.8 billion) in assets as of June 30.
According to Lions Gate’s earnings release issued on Aug. 8, the separation of Starz is expected to occur by the end of the calendar year, “subject to the timing of normal regulatory approvals.”
CPP Investments declined to comment,
A spokesperson for Lions Gate said: “The transactions and amendments are expressly permitted by the underlying agreements in all respects. The litigation is wholly without merit.”
