Liberty Media Splits From Starz; Analysts Generally Bullish

 

Premium TV company Starz is set to start trading as a separate company on Monday, and investors seemed pleased at the prospect, bidding shares of parent company Liberty Media 1 percent higher Friday to a 52-week high of $124.03.

Starz said its new board will include Hollywood power players. It will be comprised of CEO Chris Albrecht, Liberty CEO Greg Maffei, former Live Nation boss Irving Azoff, pay TV content guru Derek Chang, Susan Lyne, Jeffrey Sagansky, Daniel Sanchez, the nephew of Liberty chairman John Malone, Charles Tanabe and Warner Music Group finance and deal guru Robert Wiesenthal.

Meanwhile, Wall Street is wondering what the firm will focus its content spending on, and it's debating if and when Starz might seek a buyer.

Liberty made it official late Friday, saying it has formally split Starz from the rest of its operations. Technically speaking, Liberty spun itself out to leave Starz behind as a standalone entity. And Monday, shares of Starz will begin trading on Nasdaq under the ticker symbols STRZA and STRZB.

Maxim Group analyst John Tinker initiated coverage of Starz shares with a "buy" rating and $21 price target this week. "Looking for the Al Jazeera of pay cable?" he said in the headline of his research report, a reference to the $500 million that Al Jazeera will pay to acquire Current TV.

"Starz could be underpriced, in our opinion, as many investors may not be interested in a low-growth asset competing in a Netflix-type of world," Tinker wrote. "With this spinout, Liberty is positioning Starz in order to sell it."

But the analyst also highlighted some of his concerns.

"Disney has sold its theatrical movies to Netflix starting in 2016 rather than extend its Starz contract, Comcast Universal just re-signed with Time Warner's HBO, News Corp.'s Fox re-upped with HBO last year, CBS' Showtime has the hot product with Homeland, and Starz needs to produce a hit other than Spartacus," Tinker said.

Analysts also have wondered if Starz will pay enough to keep its other film output deal with Sony after losing Disney, or if it will redirect the saved cash into original programming.

"The primary risk to our price target is that Starz may need to invest more in risky and expensive original programming to make itself more attractive to a potential buyer," Tinker said.

"On the positive side, Starz has 17 channels with 55 million subscribers and generates $443 million operating cash flow," Tinker said. "It has long-term cable carriage contracts, has theatrical pay TV rights from Disney until 2016 and Sony Columbia until 2017, and it has a solid management team with CEO Albrecht at the helm, as well as some successful original shows, such as Magic City."

Estimating that the market values Starz at about $14 per share right now, he sees as much as 50 percent upside.

Meanwhile, Macquarie Capital analyst Amy Yong lowered her valuation for Starz from $3.3 billion to $2.9 billion, citing the recent completion of two carriage agreements at weaker financial terms as well as the impending loss of the Disney output deal.

"The pay TV distributors accounted for about 30 percent of affiliate revenue and on a pro-forma basis would have resulted in a 3 percent decline in Starz revenue through the third quarter," she said.

Discussing the content and financial strategy of the new standalone firm, Yong said: "We expect Starz will seek alternatives to partner up to share programming costs, bolster its distribution (digital and/or linear), and enter into additional licensing deals. One example could be to team up with one of its existing partners, such as Sony Studios, to share in original programming costs."

Plus, she said Starz could attract buyers like Fox or Disney. "However, since NBCU’s Universal Pictures recently renewed a film distribution agreement with HBO through 2020/2021, we believe this lowers the possibility that Comcast would be interested in the asset," she said.

Barclays Capital analyst James Ratcliffe recently used his $134 target price for the current Liberty to assign a fair value of $16 per share to Starz.

But Evercore Partners analyst Bryan Kraft, in a report titled "Liberating Starz," valued Starz at only $10 per share, or an enterprise value of $2.3 billion. This is roughly in line with where it traded as a Liberty tracking stock a while back, he said.

"While it is true that media valuation multiples have since expanded, and Starz will now have more financial leverage than it did as a tracker, we think that the risks to the business model have increased, the growth outlook has weakened, and the probability of Starz being acquired has lessened," he wrote.

Shares of Liberty Media closed 1 percent higher Thursday at $124.03.

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