Three Fascinating Special Situations

Insider Weekends

There were so many interesting situations that showed up on our list of top insider purchases and sales from last week that it was hard to pick just one to discuss briefly in this Insider Weekends article. There were at least three situations where multiple strategies came together including spinoffs with insider buying and an M&A transaction with insider buying.

Insider buying in a deal that is yet to close is very rare and only once in the 15 years that I have been tracking both M&A transactions and insider buying have I come across a similar situation. Before we discuss this highly unusual situation, I wanted to touch upon insider buying at two companies, one that completed a spinoff recently and another one that has a planned spinoff in the second half of this year.

Starz Entertainment Corp (STRZ): $18.05

Lions Gate Entertainment, the company behind movie and TV franchises like Hunger Games, John Wick, Saw and Mad Men, spun off its remaining stake in its movie and TV studios company Lionsgate Studios (LION) last month. Following this spinoff, it collapsed its two classes of shares into one and renamed itself Starz Entertainment (STRZ). This remaining Starz business is its cable TV and direct-to-consumer business that Lions Gate acquired for a rich price of $4.4 billion in 2016.

Lions Gate Franchises: Mad Men, Hunger Games and John Wick

Most of us who have observed or owned the old Lions Gate Entertainment considered the Starz business a drag on the overall company. Post-spinoff we expected Lionsgate Studios to do well and for Starz to decline. Instead, the exact opposite happened. Lionsgate Studios is down nearly 21%, while Starz is up an astounding 61% since the spinoff.

One possible explanation is that Lionsgate Studios is experiencing forced selling following the distribution of shares and that Starz has more value than was being attributed to it.

Two company insiders certainly appear to think so. Long-serving Lions Gate Entertainment Director Mark Rachesky purchased $5 million worth of stock through a private transaction from Warner Bros. Discovery (WBD) and another Director Joshua W. Sapan purchased shares on the open market.

We wrote the following about Mark Rachesky in our January 2023 Special Situations newsletter discussing Lions Gate:

The first time Lions Gate Entertainment came to our attention in 2019 was due to a series of purchases by Mark Rachesky. Dr. Rachesky, a former protégé of the famous activist investor Carl Icahn, founded his own fund, MHR Fund Management in 1996. Looking at the latest 13F filing for the firm reveals that Lions Gate Entertainment is the largest position in the fund, accounting for 40.45% of the portfolio, with over 35 million shares across both classes of Lions Gate Entertainment. In 2019, Dr. Rachesky purchased $22 million worth of Lions Gate, and early on in the pandemic, he purchased another $4.5 million worth of the stock. His initial pandemic purchases were at around $4.80 and once again when the stock was trading around $7.

Two years after his last purchase, in November 2022, Dr. Rachesky bought over 800,000 shares of Lions Gate, at an average price of $6.84 for a total of nearly $6 million. And while the stock has declined since his purchases, a cluster of insiders have also started buying shares – including purchases by Director Harry Sloan and CFO James Barge, but more importantly a series of purchases by Director Gordon Crawford.

Despite Mr. Rachesky’s involvement in Lions Gate Entertainment in 2009 and some well-timed purchases, the situation has not worked out well for investors. The recent involvement of former U.S. Secretary of the Treasury Steven Mnuchin, through his firm Liberty 77 Capital, renewed hope that we will eventually see a good outcome, especially for Lionsgate Studios (LION), which owns a valuable library of movies and TV shows that generates close to $1 billion in revenue per year. These recent Starz purchases by two directors of the company are contrary to the prevailing narrative about where the value lies in these two divisions of the old Lions Gate Entertainment.

I currently own a position in both Lionsgate Studios and Starz.

Topgolf Callaway Brands Corp (MODG): $6.43

Topgolf Callaway was created by the misguided merger of Callaway Golf Company and Topgolf International in March 2021. Callaway is a leading manufacturer of golf equipment and apparel, while Topgolf is a prominent tech-enabled golf entertainment business known for its innovative venues and technology, including the Toptracer system.

Realizing their folly in merging these two businesses, management decided in August 2024 to go through what my friend Rich Howe of Stock Spinoff Investing likes to call a demerger process by spinning off the Topgolf side of the company in the second half of this year. I have been tracking this spinoff and the precipitous drop in the stock for several months.

The big 58% drop in the stock price over the last year prompted several insiders to buy stock on the open market as you can see from the little “P” symbols on the chart. There was a cluster of insiders purchasing shares of the company last month including the CEO, the President of the Callaway Golf division and a Director.

Last week, we also saw a significant purchase, as a director bought nearly $2.5 million worth of shares. Adebayo Ogunlesi joined the board of Callaway Golf in 2010, long before its merger with Topgolf.

Mr. Ogunlesi has an interesting background. After a Bachelor’s degree from Oxford and both a Law degree and MBA from Harvard, he began his career as a law clerk to U.S. Supreme Court Associate Justice Thurgood Marshall. He was a Senior Managing Director at Blackrock and is now the CEO of the PE firm Global Infrastructure Partners.

This is only the second time he has purchased shares of Topgolf Callaway. The first time was a $2 million purchase in June 2023 and the second time was last week. The timing of the first purchase was not very good but hopefully he has it right this time.

I am watching this situation very closely and will likely buy Topgolf Callaway either before the spinoff occurs or pick one of the two divisions post-spinoff. Once we complete our analysis of the situation, we will probably include it as a spotlight idea in a future monthly newsletter.