* 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
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
"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
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.