Never mind the present's receiver would also be the present's buyer.
It's a small price to pay given what Starz would bring to such entertainment congloms as Comcast Corp. and Time Warner Inc., or to such over-the-top operators as Amazon.com Inc. and Netflix Inc. Even the biggest of these could use the boost that Starz's operating income before depreciation and amortization of $451 million and revenue of $1.6 billion -- a consensus calculation for 2012 among analysts -- would add to their financials.
Let's assume CBS Corp., Lions Gate Entertainment Corp. and Viacom Inc. are also kicking Starz's metaphorical tires -- an assumption that leads directly to our point: These suitors had better seal the deal with this objet d'acquisition in advance of Liberty's articulated plan to spin off Starz at least one step ahead of tax reform. Otherwise, before returning to the bargaining table without upsetting Starz's tax-free spin, they'll have to endure a two-year wait.
It says so in Section 355(e) of the Internal Revenue Code, which considers the acquisition of a company either two years before or two years after it's spun from a parent as part of a "prohibited plan." But there are exceptions ("safe harbors," in IRS-speak), and the one relevant to Starz is as follows:
"Acquisitions made more than two years after a distribution receive safe harbor treatment so long as there was no agreement, understanding, arrangement, or substantial negotiations at the time of the distribution or within six months thereafter."
Note that Starz's suitors would have necessarily stopped negotiating before "the time of distribution," thus allowing their return only after sitting it out a couple of years.
In an industry as fast-changing as video distribution, being side-lined for two years is suicidal. Then, too, Starz will necessarily cost more after being spun, if only because it will have escaped what even its soon-to-be ex-parent calls the "'holding company' discount inherent in Liberty Media's common stock." And that's before consideration of another valuation boost related to Starz's streaming rights for cinematic products from both Sony Corp. and the Walt Disney Co.
In 2008, Starz cut a deal that paid between $25 million and $30 million a year for Netflix to exploit those streaming rights. Starz and Liberty (and everyone else with the possible exception of Netflix) initially regarded the payments as found money, having no idea back then that the streaming product they delivered to Netflix would turn OTT operators into a force capable of challenging the entertainment firmament.
That all changed, however, when the Starz-Netflix deal came up for renewal in 2011. According to unchallenged reports, Netflix offered between $250 million and $300 million a year (with half being repatriated to Sony and Disney for use of their product) for the same streaming rights obtained just four years earlier for a tenth of that amount.
Despite a much better offer, Starz chose not to renew. Yet those rights are still Starz's to sell, and when they are sold, they'll at least command Netflix's minimal offer of $250 million (with half going to Starz). This, in turn, promises to increase Starz's projected equity component by $875 million once the minimal Ebitda multiple of 7 is applied to any streaming-rights bonanza.
So, as a buyer, when do you take your Starz stand? Now, when it is burdened with a holding-company discount and is without a streaming-rights deal? Or two years out, when it is a pure-play media company with a valuation bolstered by a rich multi-year contract not only for its own content but also for the content of Sony and Disney?
Jeremy C. Stein, a former member of the Board of Governors of the Federal Reserve System, will consult hedge fund BlueMountain Capital Management LLC. For other updates launch today's Movers & shakers slideshow.
Rob Kindler, the global head of M&A and vice chairman at Morgan Stanley, says that the M&A market remains strong, continuing trends from last year. More video