Netflix's Disney Deal: What It Could Mean for Starz

Wall Street observers opined Wednesday about what the new film licensing deal between Disney and Netflix will mean for premium TV firm Starz, whose current output deal with Disney runs through 2016.
 
With John Malone's Liberty Media set to spin off Starz around the end of the year, analysts chimed in on the potential financial and strategic implications for the soon-to-be public company.

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Many argued that Netflix outbid Starz for the Disney studio content and that Starz wasn't willing to pay up. Instead, it now could look to increase its recent focus on original shows, they suggested. But some also argued that the loss of Disney movies in the future would increase the risk for Starz and its pay TV carriage deals.

Analysts have in the past also suggested that Starz could look to sell itself to a bigger entertainment company some time in the future following a run as a standalone company, with Comcast-controlled NBCUniversal and others that don't already own a premium TV arm as possible suitors.

Canaccord Genuity analyst Tom Eagan highlighted that Liberty Media's stock fell nearly 5 percent Tuesday following the Netflix announcement that it would have the premium TV rights to Disney films starting with those released in 2016. "We interpret this as a significant buying opportunity, because the pullback increased the discount to Liberty's net asset value," he said. "Or in other words, Liberty Media holders now get Starz for approximately $325 million, while it’s likely worth closer to $2 billion."

He added, "Our take is that [Starz] considered the Disney price too high to renew."

Instead, Eagan argued, Starz could spend the freed-up cash on new originals. "If, for example, the [Disney] renewal price were $300 million per year, that would equal approximately 10 additional scripted series on Starz," he said. "And while the Disney titles have been a driver in enhancing Starz’s distribution, it has been the originals, like the Spartacus franchise, that have fueled awareness of the Starz brand."

Barclays' James Ratcliffe also called the stock drop "excessive." He echoed: "We don't expect the deal to affect the planned split of Starz from Liberty Media. … At current valuations, Liberty Media investors are getting Starz almost for free."

He added: "Even at a 30 percent discount on the other assets, the market is assigning no value to post-Disney Starz. We disagree."

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At the core, he argued that "Starz viewed the Disney content as attractive, but not a "must-have," and that Netflix was willing to pay materially more to lock in the content."

Concluded Ratcliffe: "The Disney/Netflix deal highlights the importance of original content to Starz's future, as originals will increasingly be the driver that causes customers to choose to subscribe to Starz (or not)."

Morgan Stanley's Benjamin Swinburne also predicted that Starz "may invest to expand its slate of originals ahead of Disney film costs rolling off in 2017," which could pressure operating cash flow.

"On the revenue side, we recently noted risk to affiliate fees as Starz lacks scale and bargaining power with distributors," he added. "The loss of Disney provides pretext for tougher negotiations."

Swinburne asked if Starz could be able to replicate Showtime's recent success. "Following the CBS/Viacom split, Showtime aggressively and successfully moved to redirect programming spend away from film (allowing Paramount, Lionsgate and MGM deals to lapse) and toward originals," he wrote. "However, we note that Showtime benefits from leveraging the scale of the CBS network in its distribution deals."

All in all, the analyst raised doubts that Starz could become as aggressive in originals as Showtime. "The key unknown is whether Starz will be able to execute a similar move with less bargaining power to hold rates during its transition," he said.

Lazard Capital Markets analyst Barton Crockett was one of the most bearish on Starz. "One clear upshot of Netflix's surprise deal to take over the Disney pay TV rights from Starz in 2017 offers more questions about the long-term viability of Starz," he said. He cut his Liberty price target by $8 to $134

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Debt ratings agency Moody's Investors Service said that it was keeping a stable ratings outlook on Starz after the Netflix-Disney deal. "But the agreement is a credit negative development for Starz that highlights its vulnerability in the evolving content distribution landscape and could create downward pressure on Starz's ratings," it said.

Email: Georg.Szalai@thr.com
Twitter: @georgszalai