* Sirius transaction will be tax-free
* Sirius shares up 8 pct; could reach $2.85 - analyst
* Separate Starz will have $1.5 billion in debt
* Starz subscribers up 9 percent to 20.7 million
By Yinka Adegoke
Aug 8 Media mogul John Malone's Liberty Media Corp plans to spin off its premium pay-TV network Starz LLC into a separate public company in a deal seen as the latest step to taking control of satellite radio company Sirius XM .
Starz, which runs eponymous movie and TV channels as well as Encore-branded movie channels, will become a separate listed company with about $1.5 billion of debt.
Liberty Media has previously said it was considering a tax-free spinoff of its 46 percent stake in satellite radio provider Sirius XM. On Tuesday, Sirius XM said it has been speaking regularly with Liberty.
In May, Liberty Media told the U.S. Federal Communications Commission it intended to take control of Sirius.
Separating Starz could make it easier for Liberty Media to merge with Sirius XM, though Liberty Media Chief Executive Greg Maffei said the spinoff had no bearing on its plans for Sirius.
"Our view is that Sirius is under leveraged, and there's plenty of opportunity for share repurchases and other financial actions at the company, which we deem ultimately positive," Maffei said on a conference call.
The discussion around an imminent Liberty-Sirius deal boosted Siri shares as much as 8 percent to a year-high of $2.51.
Analysts highlighted Maffei's comments on a potential aggressive share buyback by Sirius, saying the move could boost its equity value.
"Liberty, we believe, sees what we do, that repurchase could drive Sirius' equity value well above our $2.85 price target, which does not factor in a repurchase," said Lazard Markets analyst Barton Crocket in a client note.
Others saw it as a "logical step" toward a merger or Reverse Morris Trust (RMT) transaction with the remaining Liberty Media assets and Sirius XM Radio. An RMT transaction could enable the transfer of company assets without having to pay taxes on the deal.
"If that is the way the transaction occurs, saddling Sirius with non-strategic assets could be a marginal negative for Sirius shareholders," ISI Group analyst Vijay Jayant said.
Starz had about 20.7 million subscribers at the end of the quarter, up 9 percent, while Encore's brands have about 34.2 million, up 4 percent. Starz has invested significantly in creating new original programming such as the political drama television show "Boss" and "Magic City" as it competes with larger premium channel rivals like Time Warner Inc's HBO and CBS Corp's Showtime.
As a small, standalone, movie channel business with exclusive rights to distribute Sony Pictures and Walt Disney Co movies, it will likely be an attractive acquisition target, particularly to new entrants trying to get into the media business.
"Starz simply cannot fund the level of original programming it would like to compete with HBO and Showtime, not to mention the ramping original spend of new entrants like Netflix ," Richard Greenfield, an analyst for BTIG trading, said in his blog.
Greenfield said Starz needs to be part of a larger entity such as a Time Warner, NBC or even Netflix.
Starz President Chris Albrecht said about 19 percent of its Starz channel revenue will be up for renewal with pay-TV distributors by the end of the year. He declined to give further details.
Starz's second-quarter revenue was flat at $403 million, while adjusted operating income before depreciation and amortization fell 8.5 percent to $108 million.
"We think it's a good thing for the stock, which is likely not getting full value for Starz as part of Liberty Media," said Canaccord Genuity analyst Thomas Eagan.
Liberty owns stakes in a variety of businesses, including book retailer Barnes & Noble Inc, concert promoter Live Nation Entertainment Inc, and smaller stakes in others including cable television company Discovery Communications Inc . It is known for engineering complicated deal structures that minimize taxes.
Liberty Media's quarterly revenue was flat at $537 million while net earnings rose 75 percent to $156 million, boosted by an $85 million tax benefit.
On Nasdaq, Sirius rose about 18 cents to $2.48, while Liberty Media was up $2.44 at $101.89.