What’s in the cards for Starz?
After its separation from parent company Liberty Media is complete, the fate of Starz will be a bellwether of how Wall Streeters and media moguls view the long-term prospects of the premium cable biz.
Liberty confirmed earlier this month what many long suspected: the Starz-Encore collection of 17 channels will be separated from the rest of Liberty’s assets into a stand-alone entity with a separate stock. The move was immediately seen as John Malone hanging the “for sale” sign on the company, as the spinoff, which should be finalized by the end of the year, will make it much easier for prospective suitors to acquire the company, which also encompasses distrib Anchor Bay.
The insta-speculation about who may be interested in Starz was telling in and of itself. Google, Netflix, Amazon and the nascent Verizon-Redbox joint venture are on the list of nine likely contenders offered by respected media biz analyst Richard Greenfield of BTIG Research, along with the usual suspects: Comcast-NBCUniversal, Disney, Time Warner, CBS and News Corp.
Interest in Starz from the digital heavyweights would be no surprise as they are all investing mightily in building up on-demand programming platforms to compete with traditional multichannel video providers.
A Starz purchase would amount to pocket change for Google, with its considerable resources. Starz has been valued at around $2 billion-$2.5 billion, with revenue in 2011 of $1.6 billion and operating income of $424 million.
But scouting the field of potential buyers raises the question of what Starz is exactly. Its value stems from the channels’ broad distribution on major cable systems and satcasters DirecTV and Dish Network, and its movie output deals with Disney and Sony Pictures. Starz’s six channels have 20.7 million subscribers; the Encore group counts 34.2 million.
The carriage pacts that Starz relies on to generate its subscriber revenue could be imperiled if Starz was scooped up by an entity that cablers and satcasters see as a threat. Liberty noted in its second quarter earnings report that 58% of Starz revenue for the quarter came from its three largest distributors: Comcast, DirecTV and Dish Network. And Starz is also facing the expiration of carriage deals by year’s end with distribs that account for 19% of its revenue (one of which is believed to be Time Warner Cable).
Although Starz has significantly increased its investment in original programming, new theatrical releases remain a crucial piece of the programming mix for premium cablers. Movies are more important to Starz than to HBO or Showtime because Starz doesn’t have the same bench of original series as its older rivals (Starz launched in 1994). Liberty recruited former HBO topper Chris Albrecht in 2010 to ramp up originals with edgy drama series such as “Boss,” which just bowed its second season. Albrecht has spent a lot of time streamlining operations finding innovative ways to fund productions that Starz can also license overseas.
But when it comes to movies, Starz’s pipeline is unpredictable. Its existing pact with Disney covers pics released through 2015; the Sony deal runs through 2016. That’s not a long time at a moment when the market for movie rights deals is in flux — just look at Epix, the 4-year-old pay TV partnership of Viacom, Lionsgate and MGM. The Epix partners were saved by an output deal inked with Netflix Netflix at a moment when the latter was desperate for fresh, high-end content.
Interestingly, News Corp. appears to have voted with its feet by inking a 10-year extension earlier this month of 20th Century Fox’s output deal with HBO. That move, which came a week after Liberty made the Starz split announcement, makes no sense if News Corp. had any designs on adding a pay TV cluster to its cable assets.
Given that Time Warner already has HBO and CBS Corp. has Showtime, BTIG’s Greenfield calls NBCUniversal the “ideal buyer” for Starz, as it has the cable heft from Comcast and U’s supply of pics.
On paper it makes sense, especially with Starz having little debt and steady cash flow, but Brian Roberts may have other ideas. After all, Liberty has made it clear that it’s pushing Starz out of the nest to free up cash for its dogged pursuit of Sirius XM Satellite Radio and Live Nation. John Malone’s shift in focus away from the maturing premium cable market may give other media CEOs pause before they pounce.
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