Starz Spinoff Could Clear Way for Liberty Merger with Sirius XM
Liberty Media’s plans for spinning off Starz as a separate publicly traded company could clear the way for Liberty merging with Sirius XM, analysts said.
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Under the agreement announced Wednesday, Starz, with about $1.5 billion in debt and $1 billion in cash and liquid investments, will become a separate company, while Liberty Media continues as a new company focused on ownership of the Atlanta Braves and investments in Barnes & Noble, Live Nation, Sirius XM and TruePosition. Liberty is awaiting the FCC’s decision on a request that it reconsider the International Bureau’s dismissal of application to gain de facto control of Sirius. Liberty owns 46 percent of Sirius XM and is pushing for 51 percent.
While Liberty has argued that a Reverse Morris Trust (RMT) is an avenue for gaining control of Sirius XM, that option probably wouldn’t be deployed in the next six months, CEO Gregory Maffei said Wednesday on a conference call. For the time being, Liberty is more interested in having Sirius re-leverage its debt and get “the appropriate valuation” for the satellite radio operator, Maffei said. An RMT is when a parent company sells off an asset while at the same merging the spin-off with a separate external company. The new and separately merged company then distributes its shares back to the parent’s shareholders.
"We have to get to 51 percent anyway and you get there either because you bought in the market place, there was some combination of assets that we put into the mix or they paid a dividend to shareholders,” Maffei said. “We think the valuation of Sirius is likely to go up upon a re-leveraging or further leveraging of the company and we probably want to participate in that. There is flexibility in the capital structure at Sirius for them to lever further a return of capital to shareholders including ourselves."
As Liberty was releasing its Q2 earnings, Sirius XM on Wednesday said it planned to offer $400 million of senior notes due in 2022 to retire debt and redeem $682 million in 13 percent senior notes, which are due in 2013. Earlier this year, Sirius XM repurchased $130 million of its 9.75 percent and 13 percent notes.
Starz’ Q2 operating income slipped to $100 million from $112 million a year ago as revenue was flat at $403 million, Liberty said. Starz ended Q2 with 20.7 million subscribers, up from 19 million a year, while affiliate Encore had 34.2 million, up from 32.9 million. About 19 percent of Starz’s affiliate agreements will be up for renewal by year end, Starz CEO Chris Albrecht said. While many of the pacts are fixed rate agreements carrying annual increases, Starz also is in discussions with a “large consignment distributor” and is “looking forward to putting ourselves in a position to grow that side of our business as well,” Albrecht said.
Liberty’s debt and equity in Sirius XM was valued at $5.2 billion as of June 30, down from $6.3 billion on March 31. The value of Liberty’s investment in Barnes & Noble rose to $277 million from $232 million. Liberty had $1.8 billion in cash and liquid investments June 30, down from $2.2 billion in March.
Liberty’s Q2 net income moved up to $157 from $88 million a year ago, despite revenue decreasing to $537 million from $538 million, the company said. The downturn in revenue was tied to a decrease in revenue from Liberty affiliate TruePosition, which remains out of contract with a larger customer, Liberty said. TruePosition develops location determination and intelligence solutions for safety and national security markets.