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Starz Takeover Talks Move New Stock

Liberty Completes Separation from Premium Programmer 1/20/2013 7:00 PM Eastern

Starz had its much-awaited debut on the NASDAQ Global Market System last week, rising 10% in its first three days of trading as investors bought in mainly on the expectation that the premium channel would be a takeover target in the near future.

The programmer began trading on the NASDAQ exchange on Jan. 14, ending a nearly five-month journey to separate the premium channel’s assets from parent Liberty Media and transform Starz shares into an asset- backed security.

Starz shares opened at $14.15, rising as high as $15.75 (up 11.3%, or $1.60 each) in early trading last Monday (Jan. 14). The stock closed at $15.59 on Jan. 14, up 9.8% or $1.39 per share. Shares continued to climb on Jan. 15, closing at $16.05, up 3% (54 cents). The stock fell back slightly on Jan, 16, closing at $15.56, down 3%, or 49 cents each.

The interest in Starz shares seems to be driven by expectations that it soon could be an acquisition target. Even Liberty chairman John Malone has said publicly the premium channel could do better with a larger partner.

Analysts have speculated that possible suitors for the channel could be Time Warner Inc.’s Home Box Office, CBS’s Showtime Networks or Viacom’s startup premium channel, Epix.

In a recent note to clients, Pivotal Research Group principal and senior media and communications analyst Jeff Wlodarczak wrote that a new, larger owner would significantly boost Starz’s cash-flow potential by more than $200 million to about $650 million.

“Importantly, the way Liberty has structured the effective spin of Starz, it is tax free and we believe there are no limitations to Starz being sold immediately,” Wlodarczak wrote, adding that potential suitors would probably wait to ensure there are no potential tax issues.

In the meantime, Starz has said it will continue to invest in original programming. The channel has launched several new series in the past few years, including Camelot, Boss and Miami based period drama Magic City. The next installment of its Spartacus gladiator franchise — Spartacus: War of the Damned — is scheduled to begin on Jan. 25 and original series Da Vinci’s Demons is scheduled to premiere later this year.

In a research report Jan. 14, Morgan Stanley media analyst Ben Swinburne wrote that Starz is likely to pump more money into original programming. Starz could add one new show a year, pushing its current 30 hours of originals annually to 85 hours by 2017. That is also the time Starz’s output deal with Walt Disney Studios is expected to expire.

In December Disney agreed to license its studio output to Netflix for an estimated $350 million to $400 million per year.

In his note to clients, Swinburne estimated that Starz could triple its original programming spending from about $100 million in 2012 to around $300 million in 2017.

Liberty said it completed the distribution of Starz shares on Friday Jan. 11 after the market close — Liberty Media shareholders received one share of Starz common stock for every Liberty share they held.

The complicated transaction actually involved Liberty spinning off its non-Starz assets into a separate company, temporarily known as “Liberty Spinco,” while the Starz assets remained in Liberty Media. Once the distribution was complete, Liberty Media changed its name to Starz, and began trading under the symbols “STRZA” on Jan. 14, while Spinco changed its name to Liberty Media and began trading under the temporary symbol “LMCAD” on Jan. 14. On Jan. 22, Liberty Media will begin trading under “LMCA.”

Following the spin, Liberty’s principal assets include consolidated subsidiaries Atlanta National League Baseball Club (Major League Baseball’s Braves) and TruePosition, equity affiliates Sirius XM Radio and Live Nation Entertainment and minority investments in public companies such as Barnes & Noble, Time Warner Inc., Time Warner Cable and Viacom. Starz’s businesses and assets consist of those of Starz LLC, its wholly owned subsidiary.

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