Starz (STRZA) was spun off in January from Liberty Media Holdings and, in my opinion, is significantly undervalued at current levels. First, an overview of the business (from company website):
Starz, through its subsidiaries, operates as a media and entertainment company worldwide. 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, which showcase contemporary hit movies, original series, first-run movies, and documentaries, as well as through MoviePlex that offers art house, independent films, and classic movie library content. The company also develops, produces, acquires, and distributes entertainment content to consumers on DVD, digital formats, and traditional television.
Here's why STRZA has significant upside at about $21 a share:
- Investor confusion because of the unusual nature of spin-off: Liberty Media actually spun off all its other assets and renamed the company Starz, with the all the spun-off material taking the Liberty Media name and ticker symbol. One effect of this has been confusion among the data suppliers; for example, Yahoo! Finance and Google Finance both give the growth rates and fundamentals of the old Liberty Media for its values because it's technically the same entity as before.
- Liberty CEO John Malone has a history of these unusual types of transactions, and they've almost always created a lot of wealth for him and shareholders (see Liberty Entertainment, DTV sports, etc.)
- The business itself is attractive. STRZA has grown revenues, EBITDA, and subscriptions every single year, even through the global recession. Company is asset-light, maintains great margins, and gets returns on capital north of 90%. It did take on about $1B in debt from the spinoff transaction, but it generates a lot of FCF so I don't think that'll be an issue. Management expects growth trend should continue as housing makes comeback.
- The news that a lot of people are focusing on is that Starz hasn't been able to come to a new agreement with Netflix (NFLX) about digital streaming. However, the revenue from that deal was only $30M a year, which is 2-3% of its total. So if there's no agreement the rev loss isn't huge, but considering that the recent DIS-NFLX deal was around $300M, any future agreement could be a huge boost to STRZA earnings.
- Last month the company extended a deal with Sony that gives them first-run rights through 2021, which allows them to maintain important exclusive content for their network.
- The company has decided to focus on original programming, which will reduce dependence on outside deals and create demand from within, similar to what HBO and AMC have had a lot of success in doing the last few years. New CEO is the former president of HBO original programming and was key to the development of many of their most successful shows, like Sopranos and Entourage. Early reviews on several of their new shows, such as Da Vinci's Demons, have been positive too.
-STRZA is the only stand-alone premium TV channel and is thought to be a strong acquisition candidate. The timing of this acquisition could have been sped up last month when Comcast (CMCSA) bought the rest of NBC earlier than expected, as some media company might want to snap Starz up before someone else does in this period of increased M&A activity (DirecTV (DTV) also tried to buy it in 2009). If so, the deal will likely be done at a significant premium to current prices; STRZA trades at about 9x EV/EBITDA right now, but every TV channel purchase since 2000 has been done at or above 15x, with most at 17-18x.
- Even if the company remains independent and is unable to produce an original hit show or grow significantly I think there's valuation upside, as the only other major channels trading publicly (AMCX and OUTD) are at 13x and 18x EV/EBITDA, respectively, with fewer catalysts.
- A lot of other smart people in on this trade. Berkshire Hathaway (BRK.A) recently opened a position and is now the 3rd largest shareholder. Hedge funds Tiger Global and SAC have been accumulating as well.