Starz Stock Rises in Market Debut

The stock of premium TV company Starz climbed in early Monday trading in its market debut as a separate entity.

Late Friday, the company, whose hit shows include Spartacus, had completed its split from John Malone‘s Liberty Media.

As of 9:50 a.m. ET on Monday, Starz shares were trading at $14.56, up 2.5 percent from their $14.20 closing price on Friday of its when-issued stock, which set the week-ending comparison. That gave the company, led by CEO Chris Albrecht, a market value of $1.6 billion.

Analysts had started coverage of the new Starz stock with mixed views.

Maxim Group analyst John Tinker started his coverage of Starz with a “buy” rating and $21 price target. “Looking for the Al Jazeera of pay cable?” he asked in the headline of his research report. “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.”

But Tinker also highlighted: “With this spinout, Liberty is positioning Starz in order to sell it.”

Other analysts were more cautious, emphasizing open questions, such as how much money Starz would put into its original programming efforts and whether it would pay up to extend a Sony film output deal after recently losing Disney films to Netflix down the line.

Janney Montgomery Scott analyst Tony Wible on Monday gave Starz’s stock a “sell” rating in a report entitled, “Sell the Black Swan — Risk Trumps Return.”

“We rate Starz ‘sell’ following the spinoff of Liberty Media assets as we believe the asset needs to trade at a deeply discounted valuation to account for the substantial risk associated with losing key Starz executives and/or essential Sony content,” he wrote. “In the event Starz can retain Sony’s rights, we believe it will be forced to pay considerably more for the content on terms that would supersede the current contract. Furthermore, we believe Starz will face pricing pressure as it renews its [pay TV carriage] deals given the forthcoming loss of DIS content and the lack of ‘must have’ originals.”

He started Starz at a $10.50 fair value estimate.

About the Sony output deal negotiations, Wible said Starz “faces competitors that do not need to yet sustain a profit margin to satisfy their shareholder base.” He explained: “Netflix may want to secure the rights to eliminate any future competition. Amazon may need a deal to counter the Netflix/Disney deal and can offer support to Sony (e.g., retail support of its consumer electronics product) that cannot be matched by any of its streaming or pay TV competitors.”

Given that Sony is the only major studio pay TV deal that remains up for grabs this decade, “this tight supply/high demand dynamic may force Starz to pay up to $400 million per year to retain Sony’s rights,” Wible suggested. This could reduce its annualized operating cash flow by over 50 percent, he estimated.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai