Will a Cable Network Buy This Spin-Off?

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Barely one month after being spun off from Englewood, Colorado-based Liberty Media Group (NASDAQ: LMCA), Starz (NASDAQ: STRZA) appears to be shopping itself to interested buyers. Although the terms of any potential deal remain hazy, the company fully expects to be purchased by another media company during 2013. Possible buyers include media giants like CBS Corporation (NYSE: CBS), Time Warner Corporation (TWX) and Viacom (NASDAQ: VIAB). Meanwhile, Starz began trading as a separate company on January 14, 2013.  CBS and Viacom, with about $1 billion in cash each, would need to get financing which shouldn’t be too difficult given both of the company’s assets and profitability.  Time Warner, on the other hand, has over $3 billion available in cash so it wouldn’t need outside capital to make an acquisition.

Under the terms of the $3 billion spin-off, former Liberty Media Shareholders (LMCAV - defunct) were entitled to receive one share of "new" Liberty Media stock as well as one share of the new Starz stock. Shareholders who received the new Starz shares have already made a considerable profit on their investment: Since the completion of the spin-off, the stock has shot from $14.20 per share to its current range between $15.60 and $16.20. On January 15, it closed at $16.05 per share and had provided a return of approximately 13 percent in two days. Meanwhile, Liberty Media shares have remained range-bound between $108 and $110 per share.

Post Spin-off Businesses
After the spin-off, Liberty Media manages a reduced but still robust portfolio that consists of several well-known media, entertainment and logistics properties. Its largest single holding is a controlling stake in the Atlanta National Baseball Company. The company also owns Berwyn, Pennsylvania-based emergency-response company TruePosition as well as minority stakes in Barnes and Noble, SiriusXM and Time Warner Cable.

Starz's primary holdings are Starz and Encore, its two subscription-based cable movie channels. Despite its lack of diversification, the company is in a strong position. In fact, it was clearly the prop that held up Liberty during the two companies' long-standing marriage: Over the past several years, it has transferred nearly $2 billion in cash to its former parent. The company employs about 2,500 employees in Colorado.

With tremendous growth potential in the subscription-movie service space, Starz appears to provide an excellent value for current and potential shareholders. Although it was recently beaten by Netflix in a bidding war over the exclusive exhibition rights for certain syndicated Disney properties, this was widely seen as a strategic move to reduce its liabilities in preparation for the spin-off. With little debt and over $400 million in cash remaining on its books, it looks well-positioned to accept a buyout offer.

Should the company choose to pursue a deal, it could fetch well over $3 billion on the open market. Its Starz and Encore channels are included in the premium-subscription packages offered by virtually all of the major cable providers that operate in the United States. Starz enjoys an especially close relationship with Atlanta-based cable provider Cox Communications. With operations across a wide swathe of the American South, Cox recently partnered with Starz to launch a series of multi-platform services under the "PLAY" moniker.

Thus far, the company has launched three beta versions: StarzPLAY, EncorePLAY and MovieplexPLAY. These interactive interfaces are designed to allow Starz and Encore subscribers to stream about 1,500 movies on a variety of mobile devices, including the iPhone, iPad and iPod Touch. The company is developing an Android version of the service and is actively seeking to ink deals to extend it to other cable providers' networks.

Potential Suitors
This effort may make Starz particularly attractive to major networks or media companies like CBS and Viacom. Should the beta versions of these new Starz services prove popular and effective, either of these companies would stand to gain a tremendous advantage over their competitors by subsuming Starz's movie holdings into its media portfolio. Starz owns the rights to many popular movies and has a stranglehold on important action, comedy and ethnic niches. With CBS intent on diversifying away from its broadcast-heavy lineup and Viacom still cruising off of the success of Comedy Central and other cable properties, both companies could stand to benefit from acquiring Starz. Then again, plenty of other cable and media providers may stand in their way.

Although the terms of any potential deal have yet to be finalized, it appears likely that Starz will not remain an independent company for very long. At the same time, its current valuation suggests that investors are not bidding it up in anticipation of a buyout offer. As such, any potential suitor might have to offer a considerable premium to be taken seriously by its board of directors and shareholders. An offer price in the $19-per-share range would provide current shareholders with a premium of about 19 percent.

Investors who wish to take advantage of any such premium should buy into Starz during the coming weeks or risk forgoing any significant buyout premium. The first quarter of 2013 will be instrumental in determining the fate of this newly spun-off media prize.

mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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