Ownership question hangs over Starz stock

Analysts: Epix, Netflix among merger possibilities

Newbie media stock Starz completed its first full week as a public company Friday as two Wall Streeters slapped a “neutral” rating on the shares. One revived the idea of a merger with Epix as the pay cabler’s only logical option.

Starz, which has been spun off by Liberty, had a nice 10% pop its first day out and a strong run. It closed down 1.26% Friday at $15.69 on a more cautious outlook, but analysts’ price targets are still all over the map — anywhere from a paltry $10 to a lofty $21 a share.

Enthusiasm for Starz is tempered because there’s still doubt over who will be its new owner. Starz CEO Chris Albrecht, Liberty Media chief John Malone and players from Wall Street to Hollywood all say Starz needs a buyer, but can’t figure who is most suited. There’s been speculation about Netflix, but a potential merger with smaller rival Epix was the most recent possible buyer headline.

Vasily Karasyov of Susquehana Group said the pay-TV market is overcrowded. HBO dominates, followed by Showtime and now Netflix, with pressure in the wings from Amazon. So “no matter how appealing Starz programming is or will be, MSOs will leverage Starz and Epix against each other, which will keep the pressure on,” he said.

He’s talking about downward pressure on rates as carriage deals come up for renewal, but as merged companies, Epix and Starz would have more leverage.

A spokesman for Viacom, which is Epix’ biggest shareholder, declined to comment.

Starz would gain some breathing room as it ramps up originals. With Viacom behind it, Starz would have more control over studio product, and more leverage with MSOs.

Epix would see its subscriber base double and reduce its dependence on relicensing of digital rights to boost profits.

One industry observer noted that both networks have been around for years and Starz going public doesn’t change the rationale for a deal, which could have happened any time if the parties wanted it to, he said.

Epix, which is co-owned by Viacom, Paramount, Lionsgate and MGM, launched in 2009. It has about 10 million subscribers, and Starz has double that.

A deal with a studio or a video distributor wouldn’t improve Starz’s competitive position to the same degree, Karasyov said. An acquisition by a conglom such as News Corp. or Disney or a pure play cable programmers such as Scripps or Discovery might be great for Starz, “but offers little in terms of synergies for the acquirer.”

A studio merger would be based on securing an output deal, but Sony Pictures remains the only major that hasn’t renewed one recently. Sony is contracted with Starz through the end of 2016.

Starz’s other major pact with Walt Disney runs through 2015, but the Mouse House recently reupped with Netflix. Starz has an output deal with Anchor Bay Films and library programming agreements with Lionsgate, Sony, MGM, Warner Bros., Universal and Twentieth Century Fox.

“Recent output deals locking up theatrical rights for most of the major studios suggest that near-term strategic interest in Starz may be limited,” agreed Barclays analysts Chris Merwin and Anthony DiClemente. They almost certainly mean Starz won’t get a premium price in a sale.

The duo says original programming will be the key driver of Starz long-term value. Its shows includes “Spartacus,” which wraps this year, “Magic City,” starting its second season this summer, and the upcoming “Da Vinci’s Demons,” “Marco Polo,” “The White Queen” and “Black Sails.”

They see Starz bidding aggressively for Sony’s film output and ultimately renewing sometime this year.

“By filling most of its schedule with output rights from a top studio like Sony, in addition to its second window and library product, we believe Starz can focus on executing its more important strategic initiative: original programming,” Barclays said.

The firm pointed out that Starz wasn’t allowed to have substantial M&A conversations prior to the spin-off in order to maintain the tax-free conditions that were so important to Liberty’s Malone.

“While there are no explicit rules governing spin-offs, past precedent suggest that it would be wise for Starz to wait at least six months before initiating any serious talks,” Barclays said.

The Starz and Encore channels are the biggest piece of the business, repping about 80% of revenue and nearly all the profit for 2012. Starz Distribution includes homevideo, digital media and worldwide distribution and is 25% owned by the Weinstein Co. Starz Animation is comprised of Film Roman, a producer of 2D animated content for movies and TV.

The company’s board is fairly high-wattage, including CEO Albrecht, music impresario Irving Azoff, DirecTV’s longtime chief programmer Derek Chang, former ABC Entertainment topper Susan Lyne, TV vet Jeff Sagansky and Robert Wiesenthal, who was recently named COO of Warner Music.

Both firms gave Starz a neutral rating, which means that buyers should keep shares that they own, but wouldn’t advise buying more. Karasyov sees the shares rising to $18 by the end of the year, with Barclays $15 per share.