Starz Has A Strong Opening On Wall Street, But Analysts Wonder What Happens Now?
Starz Shows Surprising Growth In Q3 Revenues, But Also In Costs
Shares appreciated 9% to $15.69 in the first week after Liberty Media spun Starz off as an independent company. But its debut was also greeted by analyst reports that raised concerns about its prospects. Barclays Equity Research’s Chris Merwin initiated coverage today with an “equal weight” rating, and $15 price target. He fears that the premium pay TV network company won’t find a buyer or partner soon, and could soon see its profit margins shrink. Outlays for original programming will rise: Starz could have as much as 60 hours of originals in 2014, up from 38 hours this year — potentially raising next year’s production costs by 20% to $241M — the analyst says. In addition, execs soon will have to start negotiating to extend Starz’ movie carriage deal with Sony, which expires at the end of 2016. That could be costly. Starz needs Sony more than ever now that Disney has said it will move its films to Netflix beginning in 2016. And Merwin predicts that “other bidders, particularly Netflix and Amazon, could make competitive offers” for the studio’s films.
Susquehanna Financial Group’s Vasily Karasyov raised similar points yesterday when he initiated coverage of Starz with a “neutral” rating and $18 price target. His biggest concern is that there are too many other premium channels led by HBO and Showtime. That saps Starz’ bargaining leverage, which is why “we think Starz saw per-subscriber fees negotiated down 10% in the latest round of carriage deal renewals.” That could change if a powerful media company bought Starz, but he considers that unlikely. “Starz is not a vital acquisition that will solve a business model problem for any of them,” he says. Comcast, which controls Universal, seemed to be best suited to make a deal — but that changed this month when Universal renewed its deal with HBO. As a result, Karasyov says that “a combination with EPIX would make the most sense.” A combined entity would have more content (EPIX is owned by Viacom, Lionsgate, and MGM) giving it more bargaining power with other studios and pay TV providers.
Maxim Group’s John Tinker has another idea. He initiated coverage last week with a “buy,” and $21 price target, noting that overseas media companies might consider picking up Starz in order to secure a foothold in the U.S. The BBC and France’s Canal Plus may want to expand , and “with an estimated market cap of ~$1.35B, Starz is an inexpensive way into the U.S. market.”