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content, content, content
I think Starz presents a great long term opportunity for investors and I'd like to show why.The business:Starz is an original content creator/provider in the payTV space. As you might imagine this business is attractive for several reasons. First of all you dont need a lot of capital. You have costs for content creation, but the marginal cost and the marginal capital per new subscriber is almost zero. This leads to high FCF which is a very good thing indeed.Another advantage is that the goods/service you are selling is rather unique because of your original content. This means that pricing wars are not really an option to fight off competition. It's a war in terms of quality of content. And that leads me to the main risk of this kind of business. If Starz will not be able to keep up with its competition in terms of quality and if they are not able to constantly innovate, they will have a hard time growing their business.However I dont think this should be a major concern, because the CEO of Starz is Chris Albrecht. He is the former CEO of HBO. From Wikipedia:"Under his leadership, HBO became the leader in innovative entertainment and sports programming with critically acclaimed series like Sex and the City, The Sopranos, Six Feet Under, Deadwood, Band of Brothers, The Wire and Entourage among many others." I cant help but feel pretty good about Starz when he is on board, becasue he obviously knows how to find and manage great talented people to create amazing content.So lets look at the numbers:FCF in the first half of 2013: 140 million. -->Full year expected FCF around 280-300 million.This results in a FCF yield of 10%(and growing in the future with pretty much no growth capex)With linear growth of the FCF to 450 million in 5 years, discount rate of 12% and terminal growth of 2% I receive an equity value of 4 billion compared to the current marketcap of 2.9 billion.Also they are buying back stock. In their 2Q statement they wrote that 4.2% of shares outstanding have been repurchased since January(!). With such a cash generating business I expect that to continue.John Malone loves money and i think those who share his love, should follow him into Starz.
The key benefit for Starz is its high-margin free cash flow generating capabilities, being an asset-light business with high-margins. Starz is a great spinoff investment opportunity; one that might not be available for long. The stock is trading around $23, but we see the upside target of $41, appreciation of 80%.
Potential acquisition target
Wow, the fundamentals are boggling
Investment thesis for Starz (NASDQ: STRZA)Narrative Starz was spun off by Liberty Media on January 14, 2013, although technically Liberty Media was the spin-off despite the fact that it retained most of the company assets. This was a series of complicated gyrations which I believe was a result of the way Starz loans were structured. To initiate this complicated affair the Starz subsidiary drew down its line of credit and distributed $1.8 billion to its parent company Liberty media. The majority of the assets of Liberty Media including significant stakes in Sirius Xm, LiveNation, Barnes & Noble, the Atlanta Braves and TruePosition were then spun-off into a temporary holding company called Spinco. This left Liberty Media with only the Starz and Encore premium cable channels. The name of this slimmed down Liberty Media was changed to Starz. Following the Starz name change Spinco was renamed Liberty Media. The practical result of all this sleight of hand was the release of a highly leveraged Starz.Starz upside potential Why might Starz be a good investment candidate?1. Spin-offs historically outperform the market. This is a classic highly-leveraged spin-off.2. Jim Malone was the driver behind this spin-out, which explains part the complicated nature of the transaction. Jim Malone famously spun-out Liberty Media while CEO of TCI in 1991 (see page 115 of Joel Greenblatt’s “You can be a Stock Market Genius”.) Jim is very good at making money, especially for himself.3. Insiders retain control of both companies. Specifically, Jim Malone while holding only 1.9 million STRZA shares of the 120 million total outstanding shares for a 1.5% stake, but holds 9 million shares of class b shares (STRZB) which entitles him to 10 votes per share versus 1 vote per share of the class A stock. As a result he controls close to 80% of the voting share.4. Berkshire Hathaway owns 5.5 million shares5. Barron’s estimates the company is worth $3 billion (http://online.barrons.com/article/SB50001424052748703711604578143553125527238.html); twice its current enterprise value. So, a per share valuation somewhere between $22-$30.6. Starz subscriber base increased 9% to 20.8 million for the three quarters ending Sept. 30, while Encore increased its subscriber base 5% to 34.3 million. A total of 55.1 million subscribers compared to HBO’s 39.5 million and Showtime’s 21.3 million.7. Those increased subscriber numbers translated into a 7% increase in net income but only a 2.2% increase in revenue and free cash flow or $10.19/share.8. Let me repeat that: $10.19/sh FCF. Starz is a cash cow currently trading at 1.5 times FCF. Even a very conservative valuation of 5 times FCF puts the valuation at $50/share. So, the $1.1 billion in debt (at favorable terms) shouldn’t be a problem.9. Earnings are $1.69/sh through the first nine months. That works out to a 9.28 PE ratio with three months of earnings still to go.10. Starz tracking stock was trading between $46.04 and $81.36 in 2010 and 2011.11. Adding new, original content like ‘Sparticus’.Downside potential1. $1.1 billion in new debt. LIBOR rates could suddenly skyrocket - OK, may not. 2. Subscriber growth could slow. Even if it did it would still give one plenty of time to exit.3. Contract with Disney is expiring in 2015 and with Sony in 2016. So, content may suffer. 4. Adding new, original content which could be pricey to produce.SummaryMalone seems to have set this up as a take-over target. Names of potential buyers being floated are Disney, Sony, Comcast, Netflix and Univision. I’d expect to see a move to snap up Starz within the next year.
John Malone is an aggressive player and is successful most of the time.
rising relative strength. accumulation.
Following the smart money.
Owns 50 percent stake in DirecTV. Trading at less than half of net asset value
New screen; from 3 stars three months ago, 4 stars two months ago, and five stars this month
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