Analysts: Liberty Media's Starz Spin-Off Opens Up Deal Possibilities

Starz Logo - H 2012

Starz Logo - H 2012

UPDATED: CEO Chris Albrecht and observers say Starz could go after alliances and deals, but some say it eventually might be acquired by an entertainment conglomerate.

Liberty Media's surprise news Wednesday that it would spin off premium TV arm Starz into a stand-alone company late this year could open up deal options, including a sale of Starz to an entertainment conglomerate, according to Wall Street observers.

ISI Media analyst Vijay Jayant said the spin will enable Starz, led by CEO Chris Albrecht, "to operate independently or eventually merge with an entertainment conglomerate with studio operations."

Barclays Capital analyst James Ratcliffe similarly said the spin "increases [the] probability of Starz M&A."

Liberty noted in its announcement that the transaction will create "two currencies that could be used for acquisitions." Albrecht told an analyst conference call that though there are "great benefits" to being part of Liberty, the split will give Starz a "currency to explore potential alliances" and other deals. He said "a long list" of companies was interested in having alliances with Starz.

He said Starz had "all sorts of value-enhancing" opportunities" but declined to mention a specific deal possibility that he would like to pursue.

But Ratcliffe suggested that not only might Starz be able to acquire or strike alliances with various companies, it could itself end up in the hands of a larger company. He highlighted that Liberty technically speaking chose not to spin off Starz but the rest of its businesses from Starz.

"We continued to believe that Starz would be more valuable as part of a larger portfolio of cable network assets (due to economies of scale and greater leverage with distributors)," he wrote in a report. "By leaving Starz in the current Liberty Media shell, rather than making it the spin company, we believe that Liberty makes a sale of Starz or a merger with another programmer easier from a tax perspective."
The result will be an operating company that "can now be valued on a straightforward multiples basis rather than as part of a more complex" calculation as part of a broader holding company like Liberty, the analyst said.

Analysts have mentioned all major entertainment companies as possible Starz suitors, especially those with studio operations and those who don't own a premium TV arm. Ratcliffe values Starz at around $2.8 billion.

The spin in essence reverses a combination awhile back of the Liberty Starz and Liberty Media tracking stocks but this time will create two stand-alone corporate entities. Ratcliffe said this "is likely to shrink Liberty's overall discount to [its] net asset value," which has been a constant due to the company's holding company structure.

Wall Street folks said the Starz spin also will affect deal options for Liberty and satellite radio firm SiriusXM, in which it is the largest shareholder.

Said Lazard Capital Partners analyst Barton Crockett: "We see the spin process at a minimum slowing resolution of the Sirius stake and raising a question about the likelihood of a tax-free Sirius spin that we and most investors had assumed was all but assured near-term."

He added: "We doubt Liberty can move to spin or buy more of Sirius while it is going through the six-month-or-so process required to spin off Starz. It also seems harder to spin off Sirius from the remaining Liberty as the remaining assets (cash, Atlanta Braves, True Position plus stakes in Live Nation and Barnes & Noble) are small, nonoperating or noncore."

Crockett said this might suggest Liberty that could go the other way and buy more Sirius stock or exit its Sirius holding and pursue bigger stakes in Live Nation and/or Barnes & Noble. Ratcliffe echoed that the post-spin Liberty "would have the resources to acquire additional assets, including, potentially, more of Live Nation or Sirius."

The company noted that the deal "preserves all options" regarding those two holdings, but Malone has in the past signaled that he wasn't favoring Live Nation as a major long-term investment.

Jayant and others suggested that Liberty was most likely to eventually combine its remaining non-Starz holdings with Sirius to create longer-term shareholder value.

Liberty CEO Greg Maffei left his options open, saying the Starz split "has no bearing" on Liberty's Sirius strategy. "You don't want to foreclose any options," he said.

But he also said that Liberty will have "a lot of cash" after the Starz split and a related dividend, while there also remains "a ton of liquidity" at Sirius. He signaled an interest in keeping Liberty's stake in Sirius long enough to earn back some money it has put into the company.

Liberty got the first 40 percent in Sirius "for free, virtually," he said, adding that the next 11 percent is likely worth more than $1 billion. "We would likely want to get that back," he said, mentioning Sirius dividends to its shareholders, including Liberty, as a possibility.

Twitter: @georgszalai