Liberty Won’t Increase Sirius Stake Past 50 Percent in ‘Very Short Term,’ CEO Says

In addition to waiting out an FCC decision, Liberty won’t continue to increase its stake in Sirius to avoid triggering 7 percent exchangeable notes that would increase the amount of common shares, Maffei said. The notes are convertible into more than 300 million shares on a change in control of Sirius.

"We are probably at our number right now” of 49.5 percent for the time being, Maffei said. “We might tip over 50, but it’s a de minimis amount of cash to get there.” Indeed, Liberty could stand to gain around $2 billion in cash from a split off of its Starz Media that’s expected to be completed by year-end, industry analysts have said.

Sirius has benefited from an increasing array of OEM deals with automakers to have its service pre-installed and a price increase that was imposed earlier this year, Maffei said. Sirius’ content costs also are “far more controlled” than those of other companies and it has opportunity to improve its relations on a “financial basis” with automakers, he said. Sirius isn’t faced with satellite construction costs in the short term, having fully deployed its existing fleet.

While Sirius has nearly $8 billion in net operating loss (NOL) carryforwards, Liberty isn’t likely to increase its ownership to more than the 80 percent required to take advantage of them, Maffei said. NOL carryforwards involve applying a current year’s net operating loss to future years’ profits to reduce tax liability. The NOLs can be used in any one of the seven years following the loss. Boosting Liberty’s ownership above 80 percent is “highly unlikely” because “given what I said about chasing the last share, that’s probably not our strategy,” Maffei said. “There also is very little incremental value in us consolidating those tax losses. There is enough cash flow and earnings at Sirius that in a relatively short period of time they will” use those NOLs and “use all of them,” Maffei said.

With Sirius CEO Mel Karmazin’s employment contract expiring at the end of the year, “I'm sure the Sirius board is pursuing discussions” with him, Maffei said. Karmazin has said he won’t automatically leave the company if Liberty takes control. If Liberty were to spin off its stake in Sirius to its own shareholders, Karmazin has said at investor conferences that he would consider staying with the company. Maffei has maintained that spinoff of Sirius XM is a possibility. But Liberty is in “no rush to get of the Sirius stake,” Maffei has said. “I think Mel and his team has done very well,” he said.

In splitting from Liberty, Starz Media will assume $2.2 billion to $2.5 billion in debt, but will gain “more flexibility and opportunity” to pursue original programming and other content agreements as well as better position itself for a potential sale, Maffei said. While original programming currently accounts for about 25 percent of Starz content, that could increase to 30 percent to 40 percent over time as the premium channel boosts the number of original series it produces annually to three to four from one to two, Maffei said. In addition to Spartacus, Starz has released Magic City and Boss. Starz’s original programming won’t cut into earnings before interest, taxes, depreciation amortization margins because Starz has been “reinvesting” in the business with savings on movie content, Maffei said.

Maffei conceded that a company larger than Liberty with more distribution, channels and retransmission pacts “might be able to do more” with Starz. Starz management “has done a great job, but going forward is the next step helped by being part of a larger organization?” Maffei said. “We'll see.”

While over-the-top services like Netflix are increasing the amount of original programming they produce and carry, they don’t pose a challenge to premium channels like Starz and HBO, Maffei said. In the case of Netflix “they are relatively nascent” in the original programming business and “don’t have the scale and relationships” yet and “to the extent that they are successful they would not be displacing Starz or HBO,” Maffei said. “This is the highest quality content on cable and I'm actually pretty bullish in our space."

Netflix and Starz parted ways earlier this year because “our business was better served both financially and strategically by not moving forward with the terms offered,” Maffei said. The channel conflict that Starz suffered with its cable and satellite operators by having the streaming agreement with Netflix was “enormous given how Netflix wanted to position a relatively low-cost, non-premium, commoditize offering, Maffei said. “In the short term it was causing enough conflict that we were losing support with our partners,” said Maffei, who represented a combined $1.3 billion in annual revenue for Liberty. Starz will eventually have on-line tiered programming that recognizes “the premium of Starz,” he said.