Liberty Seeing Starz from Film Costs


Liberty Media Corp. warned that increased programming costs at its Starz
Encore Group LLC unit will likely decrease the premium cable services’ 2004
operating income.

Liberty said in a prepared statement that programming costs at Starz Encore
will rise between $175 million-$225 million in 2004, mainly due to the expected
box-office performance of movie titles that will become available to the premium
channels during that time frame from movie studios.

Liberty said programming costs for 2005 are expected to be about the same as

Previously, Starz Encore was able to pass through a portion of its
programming-cost increases to AT&T Broadband. But because of pending
litigation with Comcast Corp. -- which acquired AT&T Broadband in November
-- Starz Encore can no longer do that.

Comcast has argued that it should be able to keep the agreement it had with
Starz Encore prior to the AT&T Broadband acquisition. Starz Encore claimed
that the AT&T Broadband contract should move over to Comcast.

"Accordingly, unless this litigation is favorably resolved or Starz Encore is
able to generate offsetting increases in revenues or reductions in other costs,
these increased programming costs are expected to result in a direct reduction
to Starz Encore’s operating income in 2004," Liberty said in a prepared

The news apparently spooked investors, who drove down Liberty’s stock by more
than 6% (74 cents per share) in 4 p.m. trading Wednesday to $11.11 each.

Analysts saw the most recent disclosure as having a modest negative impact on
Starz Encore.

In a report, Stifel, Nicolaus & Co. Inc. cable analyst Ted Henderson said
he had estimated that programming costs were about 50% of Starz Encore’s
revenue. With the new disclosure, that percentage increased to 68% and 61% of
revenue for 2004 and 2005, respectively.

As a result, Henderson reduced his 2004 operating-income estimates for Starz
Encore to $209 million from $389 million in 2004 and to $328 million from $446
million in 2005. For 2006, Henderson reduced his operating-income estimate from
$515 million to $474 million.

Despite those changes, Henderson reiterated his 'buy' rating and his
$17-per-share price target on Liberty stock. In his report, he stated that
Liberty’s recent moves toward becoming an operating company rather than a
holding company -- characterized by its recent purchase of the remaining
interest in QVC Inc. from Comcast Corp. and its strategy to roll up minor
subsidiaries like Liberty Satellite & Technology Inc. -- should compress any
discount in valuation.