Satellite : Starz Is Ready To Rise

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Parent Liberty Media Sets Nov. 19 For Vote On Tracking Stock

The long-awaited restructuring of Liberty Media's Liberty Entertainment tracking stock got a boost last week after the company set a hard date — Nov. 19 — for a shareholder vote that would lead to the consolidation of its 57% interest in DirecTV and the spinoff of its Starz Entertainment premium channel into a separate entity.

Both the Liberty Starz tracker and consolidation of the DirecTV interest have been in the works for months. Liberty first announced its plans in May, but had been considering the consolidation of the DirecTV stake since 2008.

Liberty Entertainment currently houses Liberty Media's 100% interest in Starz Entertainment, its 57% interest in DirecTV, three regional sports networks, a 65% interest in cable channel GSN and FUN Technologies, WildBlue Communications and online entities PicksPal and Fanball.
After the deal is completed, Liberty Entertainment will be split into two (temporary) units, both called Liberty Entertainment. One will include the DirecTV interest; the RSNs (Fox Sports Pittsburgh, Fox Sports Rocky Mountain and Fox Sports Northwest); GSN; $80 million in cash; and $2 billion in debt. That entity will later be merged with DirecTV, at which time it will assume the DirecTV name.


The remaining assets — Starz, WildBlue, PicksPal, Fanball, FUN Technologies and about $650 million in cash — will become Liberty Starz.

Liberty, which has been a somewhat confusing amalgamation of tracking stocks and minority interests in other media companies over the years, is attempting to simplify its structure through the trackers, which will hold hard assets (Starz and DirecTV).

At the completion of both transactions, Liberty Media will consist of Liberty Interactive (including QVC, several e-commerce companies and interests in HSN and TicketMaster); Liberty Starz; DirecTV (the former Liberty Entertainment); and Liberty Capital (including several minority interests in media companies like Time Warner Inc. and Viacom and full ownership in the Atlanta Braves major league baseball team).

At the Oct. 16 Liberty Media investors meeting, CEO Greg Maffei said two overhanging issues on the new tracking stock — a Liberty Interactive loan still on Liberty Starz's books and concern over the future of Starz Media, the production arm of Starz Entertainment — will be cleared up soon. Maffei said investors should expect that loan to be paid in full in the near term.

The fate of Starz Media — not included in the Liberty Starz tracker at this stage — will become clearer over the next several quarters, Maffei said.

Another overhang on the Liberty Starz stock — the anemic multiples that some analysts are placing on the tracker — might take more time to rectify.

Maffei said that analysts currently value Liberty Starz at 2.9 times forward-looking cash flow. That, he said, does not reflect the strong fundamental growth at the premium channel.

Adjusted operating income before depreciation and amortization growth (AOIBDA, a measure of cash flow) was up 14% in 2008 to $301 million from $264 million at Starz and is expected to grow another 15% in 2009, Maffei said. Even that was a conservative figure and the AOIBA growth probably will be “more like 30%” for the year, he said.

Starz has 17.5 million subscribers, second only to Home Box Office. But it has languished under the shadow of HBO and Showtime Networks, mainly because of those premium networks' focus on original content.

That could change with the launch of several new series including dramas like the returning Crash and big-budget gladiator epic Spartacus: Blood and Sand, as well as original comedies Party Down, Martin Lawrence Presents 1st Amendment Standup and Gravity.



Spartacus, slated to air in January 2010, has generated the most buzz . It stars Xena: Warrior Princess and Battlestar Galactica actress Lucy Lawless and one of its executive producers is Spider-Man director Sam Raimi.

“Spartacus could be a franchise for us,” Starz executive vice president and chief financial officer Glenn Curtis said at the investors meeting.

Curtis said screenings for the Spartacus series sold out at MIPCOM in Cannes, France, this month and that Starz sales executives took more than 200 meetings about the series at that television syndication bazaar.

Starz has already made plans for a home video release (on Starz's own Anchor Bay entertainment), a video game and a motion comic tied to the series.

“All of this is to extend the reach and the frequency of Spartacus, to make people aware,” Curtis said.

Liberty Starz hasn't begun trading yet: it is expected to be listed on the NASDAQ Global Market System under the symbols “LSTZA” and “LSTZB” once the spin is complete. But it already has an implied market capitalization of about $1.96 billion, according to Maffei, hence the 2.9 cash-flow multiple.

“I think you would be hard pressed to find high quality cable networks trading at that kind of multiple anywhere else,” Maffei said.

Miller Tabak analyst David Joyce, who does not officially cover Liberty Starz yet, said that other pure-play media stocks like News Corp., Time Warner Inc. (which includes HBO), Viacom and Discovery Communications trade in the seven to 10 times estimated 2010 cash-flow range.

“Starz being in the middle of that pack would make sense,” Joyce said.

Maffei said that with more than $800 million in cash and cash equivalents after the spin and no debt, the pure-play Liberty Starz tracker could be an attractive deal currency.

“There will be a lot of content assets that are going to trade over the next few years and we will be well-positioned with a lot of cash,” Maffei said.



MULTIPLICITY
Liberty Starz, according to Liberty Media CEO Greg Maffei, is valued by some analysts at about 2.9 times forward-looking cash flow. A snapshot of other media companies' trading multiples:
EBITDA

Company Multiple
All figures are multiples of estimated 2010 EBITDA
SOURCE: Liberty and Miller Tabak

Discovery Communications 10 times
Disney 9 times
Viacom 8 times
News Corp. 7.2 times
Time Warner Inc. 6.8 times
Liberty Starz 2.9 times