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Bloomberg Businessweek: Starz Takeover Looms as Malone Faces Low Value – Real M&A

By Alex Sherman and Lindsey Rupp

“Spartacus” and 55.1 million subscribers could be up for grabs at half the median valuation of television-industry takeovers as billionaire John Malone prepares to make premium channel Starz LLC a separate company.

Liberty Media Corp. (LMCA) plans to split off its Starz unit in the coming weeks, and Chief Executive Officer Greg Maffei has said its cable networks may be more valuable to another owner, signaling a possible sale. The standalone entity may lure buyers from Comcast Corp. (CMCSA) to Sony Corp. (6758) with the chance to gain a conduit for original content, said Macquarie Group Ltd. Starz could appeal to Netflix (NFLX) Inc. by giving the streaming service a pay-TV presence, Training the Street’s Scott Rostan said.

Even as Starz develops shows such as “Spartacus” and “Party Down,” its contract for Walt Disney Co. films expires in 2015 and it trails rivals HBO and Showtime in transitioning from movies to original programming. Wunderlich Securities Inc. said Starz may be valued at $2.7 billion in a sale, including net debt, while Wedge Partners Corp. said it could fetch as much as $3 billion. That’s about 7 times analysts’ estimates for 2013 earnings before interest, taxes, depreciation and amortization, less than half the median for TV and broadcast program deals, according to data compiled by Bloomberg.

‘Nothing There’

“Starz is still a valuable asset, but it’s injured losing the Disney contract,” Matt Kaufler, a Rochester, New York-based fund manager for Federated Investors Inc., which oversees $365 billion, including Liberty Media shares, said in a telephone interview. “Starz has already pushed into some original content but it’s still in a fairly embryonic stage. The market isn’t going to reward them. There’s nothing there yet. It should sell at a discount.”

Courtnee Ulrich, a spokeswoman for Englewood, Colorado- based Liberty Media, declined to comment on the prospects of selling Starz.

Liberty Media plans to separate Starz by the end of January from the company’s other assets, including stakes in Sirius XM Radio Inc., Barnes & Noble Inc. and Live Nation Entertainment Inc.

The Starz unit consists mainly of the Starz and Encore channels, featuring movies and shows for cable-TV subscribers who pay an additional monthly fee. Starz hired Chris Albrecht, former chairman and CEO at HBO, three years ago to lead the division and develop original shows such as “Spartacus” to compete with Time Warner Inc.’s HBO and CBS Corp.’s Showtime.

Starz had 20.8 million subscribers and Encore had 34.3 million at the end of the third quarter, according to the company.

Solo Value

“This is Malone and management’s way of saying Starz has a lot of value on its own,” said Training The Street’s Rostan, a former M&A analyst whose New York-based firm trains new hires at banks on mergers.

Liberty Media’s shares today gained 1 percent to $116.43, their highest closing level since at least May 2006.

CEO Maffei said in September that a company with its own distribution channels and content “might be able to do more” with Starz than Liberty Media.

Comcast’s NBC Universal or Tokyo-based Sony could be potential buyers that would use Starz in a similar role as it serves now: as a vehicle to show first-run post-theatrical movies along with some original series, said Amy Yong, an analyst at Macquarie in New York. Starz already has a deal with Sony Pictures, while HBO’s contract with Comcast’s Universal Studios expires at the end of 2016, making a Starz deal a “perfect fit” in terms of timing for Comcast, she said.

‘Real Estate’

“It’s real estate,” Yong said. “There’s value to having 20 million subscribers for Starz and 30 million-plus for Encore.”

In a takeover, Starz could be worth $3 billion, including net debt, said Martin Pyykkonen, an analyst at Wedge Partners in Greenwood Village, Colorado. That would represent a multiple of almost 6.9 times the average analyst estimate of $438 million for 2013 Ebitda, the lowest among TV and broadcast program deals of $500 million or more, according to data compiled by Bloomberg. The median Ebitda multiple for the group is 14.1.

As a standalone, Starz warrants a lower valuation than HBO or Showtime because it has fewer original shows and its exclusive access to Disney films is set to expire after Netflix takes over the contract, said John Tinker, an analyst at Maxim Group LLC in New York. The premium channel’s movie deal with Sony Pictures also is poised to expire at the end of 2016.

Tinker said he values HBO, creator of “The Sopranos” and “Boardwalk Empire,” and Showtime, developer of the hit “Homeland,” at as much as 8 times estimated 2013 Ebitda. Starz should be valued “at a far lower price,” he said.

Univision, Netflix

The loss of Disney may actually help a buyer that wants to develop Starz’s pay-TV channels into a haven for original content because a deal now could be done at a lower valuation, according to Yong. Starz could share costs for new shows with an existing company, such as NBC Universal, that already spends billions on original programming, she said.

Chris Marangi, a money manager at Rye, New York-based Gamco Investors Inc., said Univision Communications Inc., owner of the Univision Spanish-language channel, could be interested in Starz as a way to expand into premium programming. Gamco oversees about $37 billion, including Liberty Media shares.

Even Netflix, which already develops content for its more than 30 million global streaming subscribers, may pursue Starz to showcase its original series such as “House of Cards” on a pay-TV network, Rostan said. It also would allow Netflix and Starz to share development costs, he said.

Representatives for Sony, Philadelphia-based Comcast, New York-based Univision and Netflix in Los Gatos, California, declined to comment on the companies’ interest in Starz.

Buyer Barriers

While Starz offers potential suitors an established platform for content, “there’s a lot of execution risk” developing original programming that could deter suitors, Matthew Harrigan, an analyst at Wunderlich Securities in Denver, said in a phone interview.

Comcast is stockpiling cash (CMCSA) to potentially buy the remaining 49 percent of NBC that General Electric Co. still owns and may want to avoid a cash acquisition.

“Plus they’re the cheapest guys around in terms of paying,” he said.

Comcast saw its market value close above $100 billion for the first time this week, and the largest U.S. cable company’s cash and short-term investments jumped 138 percent in the third quarter to $10.3 billion.

Cash Constraints

While Netflix is strategically interesting, its limited cash and debt capacity may prevent it from acting, Rostan said. The company’s debt (NFLX) is rated three levels below investment grade and it only has $798 million in cash and short-term investments. Sony, too, struggles from a lack of cash, Yong said, and Univision is still “a long shot,” according to Marangi.

Given Starz’s low valuation, Liberty may want to wait for some hit shows to help boost its price before putting the unit up for sale, Maxim’s Tinker said. AMC Networks Inc. (AMCX) shares have increased 25 percent from its closing price on its first official day of trading after Cablevision Systems Corp. spun it off last year, bolstered by the success of shows such as “Mad Men,” “Breaking Bad” and ”The Walking Dead.”

‘Puzzle Piece’

Starz’s existing contracts with Disney and Sony still give the channel access to exclusive content for the next few years, and its move to develop more of its own shows is a step in the right direction, said Mark Hesse-Withbroe, a Minneapolis, Minnesota-based analyst at Nuveen Asset Management, which has $112 billion under management and owns Liberty Media shares. That boosts its allure for a company such as Comcast, he said.

“I look at it as a logical puzzle piece that would fit with others,” Hesse-Withbroe said in a phone interview. “There’s stuff that people want to see on the network, and I think there’s good value there. I like the prospects for Starz.”