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Starz (STRZA) is a leading integrated global media and entertainment company. It provides premium subscription video programming services to multichannel video distributors, including cable operators, satellite television providers, and telecommunications companies through STARZ and ENCORE pay TV networks in the United States. The company also develops, produces, acquires, and distributes entertainment content to consumers on DVD, digital formats, and traditional television in the United States and internationally. Starz consists of 16 American cable and satellite TV channels or services.

Spin-off

Starz was spun off by Liberty Media (LSTZA) on January 14 as Liberty aimed to free up cash to pursue the takeover of Sirius XM Radio Inc (SIRI). Liberty Media Corp. Chairman John Malone constantly restructures his media holdings; this time the rationale was that Liberty would have more liquidity and that Starz would have "real potential growth opportunities" for its suite of premium cable-television channels.

Content

Starz extended its content agreement with Sony's (SNE) film business by five years, giving the premium cable network exclusive premium pay-television rights to Sony Pictures Entertainment movie releases through 2021. The deal comes about two months after Starz was outbid by Netflix (NFLX) for rights to Walt Disney (DIS) movies.

The developments at Starz reflect broader shifts in the premium cable sector, long dominated by Time Warner's (TWX) HBO and CBS's (CBS) Showtime. While these channels originated as outlets for movies, the proliferation of movies on various outlets including on-demand services and cheap DVD rental services has reduced their value for premium movie channels.

TV Viewing Moving Online

Starz is staking its place in this new digital battlefield with its STARZ PLAY, MOVIEPLEX PLAY and ENCORE PLAY online offerings. These interactive interfaces now allow Starz and Encore subscribers to stream about 1,500 movies on a variety of mobile devices in the United States and more than 150 international territories. To beef up its content, Starz has stolen away one of the creative geniuses that once made HBO a must have subscription service. Starz is currently launching a series of original programming under the leadership of Chris Albrecht, the creative whiz who made HBO what it was during the heyday of the Sopranos, Entourage, Sex and the City and Six Feet Under. Now Starz is scoring a growing audience with a number of original series including Spartacus: War of the Damned, Magic City, Boss and Da Vinci's Demons.

Follow The Money

Institutions and hedge funds own 80% of Starz. In January, new positions were initiated by Steve Cohen, Jeffrey Gates and Comcast (CMCSA). The largest stockholders are:

Stockholders

Shares

owned

SAC Capital - Steve Cohen

6.3M

Gates Capital - Jeffrey Gates

5.9M

Comcast

6.8M

John Malone, Chairman of Liberty Media (per a 13d filing in January)

11.2M

Berkshire Hathaway (BRK.A) - Warren Buffett

5.6M

(The above data is from morningstar)

Takeover Speculation

Starz will be the only standalone premium pay TV channel. HBO is owned by Time Warner and Showtime by CBS. It doesn't make any sense to stand alone on its own. Starz could easily be acquired by Disney or Sony, News Corp (NWS), Viacom (VIA), Time Warner or CBS. DirecTV (DTV) previously tried to acquire Starz in 2009 but couldn't agree on a valuation. Another potential suitor could be Comcast. The Comcast-NBC giant could use Starz to add a premium network to its portfolio. The takeover is especially compelling when you look at the enterprise value of how the other companies stack up to Starz.

Valuation

Starz trades at a discount to its peers:

Starz

CBS

Comcast

Enterprise Value

$1.7B

$25.4B

$85.5B

Price to Earnings

1.2

18.1

17.4

Price to Sales

0.9

1.8

1.7

Starz has $9.81 of cash per share and a book value of $53.30 per share. The projected earnings are $1.74 and the debt to equity ratio is .08 (data from finviz). In the near term, the company should be able to see price appreciation as investors realize Starz's depressed valuation. Starz plans to release fourth-quarter earnings February 27.

Blue Sky Potential

Starz is the only independent pay TV operation available. STARZ and ENCORE serve a combined 55 million subscribers, including 21 million at STARZ, and 34 million at ENCORE, making them the largest pair of premium flagship channels in the U.S. Starz owns the rights to many popular movies and has created their own original series for online viewing. The Starz and Encore channels are both included in premium-subscription packages offered by virtually all of the major US cable providers and satellite TV distributors. Subscribers do not have to pay a one channel premium payment as they do for HBO.

Based on a discounted Comcast PE of 15 and projected earnings of $1.74, Starz shares would trade at $26 which is roughly half its book value and 34% appreciation from today's price of $19.12. On January 14, Starz opened at $14.00, jumped up and then consolidated for about a month at $16. Once they signed the Sony content extension to year 2021, the stock jumped to $18 and has moved up to $19.50. After the recent run-up, I would wait for a pullback before buying. It would be ideal if the gap gets filled in the $16.90 area.


Source: Looking To The Starz