Analysts Discuss Benefits of Possible AMC Networks, Starz Deal

16 Sep 2015 | Author: | No comments yet »

AMC Networks Said in Talks to Acquire John Malone’s Starz.

With the stock of Starz rising in after-hours Tuesday after a Bloomberg News report that AMC Networks was taking another look at possibly buying the premium TV company, Wall Street analysts on Wednesday weighed in on the strategic and financial benefits of a potential deal and what it could mean for further dealmaking in the industry.AMC Networks Inc., the cable community operator that owns exhibits together with “The Strolling Lifeless,” is again in talks to accumulate billionaire John Malone’s Starz, one other TV programmer, in accordance with individuals conversant in the matter. The report about the talks between the two TV companies, which emphasized that a deal may never happen, “could mark the start of the long-awaited, Malone-driven content consolidation wave,” FBR analyst Barton Crockett wrote in a report. “The Bloomberg report post-close of renewed merger talks between $5 billion market cap, Dolan-family-controlled AMC and $4 billion market cap Starz has the potential to be seen as a bell ringer” for such a scenario. The preliminary discussions won’t end in an acquisition, stated the individuals, who requested to not be named as a result of the knowledge is personal.

Bloomberg reported the preliminary talks, which come after a few abortive attempts by suitors to acquire Starz in the past year. “They probably ultimately need to combine with others at least from a bundler point of view, if not from an ownership point of view,” John Malone — Starz’s top individual investor — said last week. Starz has a market cap of $3.9B and an enterprise value that’s grown to more than $5B from $4B last year, during a period when it was often linked to Lions Gate Entertainment (NYSE:LGF). So if someone wanted to move, this could be the time to act, or for Starz to float a trial balloon that motivates Lionsgate to act.” about a glut of quality scripted dramas and growing competition in scripted drama from Netflix,” the analyst wrote. “A merger could provide scale, helping retain affiliate fee share, and providing heft for potential over-the-top services (although Starz, unlike HBO and Showtime, has to date chosen to remain exclusive to the bundle in the U.S.).” Crockett cautioned though that “we don’t see much cost synergy, and revenue synergies would be hard to quantify,” adding: “A dearth of obvious synergies would make accretion a function of borrowing costs and debt/equity mix, meaning likely modest accretion from a low interest rate environment.” radicals” as Malone has put it,” Crockett wrote. “While Lions gate could lose out on potentially acquiring Starz, it could also be a potential target of a merged Starz/AMC, with its appeal driven by rich content and a low tax rate. Starz, which owns the Starz and Encore premium film channels, could not come to phrases final yr with potential consumers, together with New York-based AMC Networks, due to variations over valuation, individuals with information of the matter stated final December.

Starz said in a statement: “As per company policy, we do not comment on rumors or speculation.” But acquisition talk has surrounded Starz for the past few years, ever since it was spunoff from Liberty Media as a stand-alone public entity in late 2012. A combined AMC Networks and Starz would gain leverage in negotiating fees from pay-TV carriers, which have already paired off to lower costs as customers defect to online players like Netflix Inc.

Starz’s subscription-based business “generates significant steady cash flow, which could smooth out the volatility in AMC Networks’ lumpy business.” She estimated Starz will generate about $400 million in free cash flow in 2016 and 2017, which she said “could double AMC Networks’ annual free cash flow.” A deal could also “help diversify AMC Networks’ 50/50 ad/affiliate revenue stream” and could help AMC Networks launch an over-the-top distribution platform. Liberty chairman John Malone retains a sizable stake in Starz — a personal holding of Malone’s, separate from Liberty — and he has fueled Starz acquisition rumors with his recent moves. Starz’s focus on original programming “could be strengthened by AMC Networks where the management team has built a solid track record developing/marketing nameplate hits,” she said. “We expect $210 million in originals spending per annum [at Starz], which will likely step up to about $300 million … A deal for Starz would give the corporate added clout in negotiations with pay-TV suppliers, lots of that are experimenting with skinny bundles that exclude much less well-liked channels.

Malone told Bloomberg last week that he saw Starz as a “terrific, synergistic fit” with Lionsgate, although he emphasized that the ultimate decision would rest with the boards of both companies. Additional savings by eliminating selling, general and administrative overhead, marketing/advertising etc. could total $300 million-$325 million.” Yong agreed that a combination could lead to further dealmaking. “Pay TV consolidation, including AT&T-DirecTV and the pending Charter-Time Warner merger, as well as secular headwinds on the traditional bundle could place pressure on sub-scale names to seek partnerships and/or gain scale,” she said. Both AMC and Starz invest heavily in original series production and movie licensing pacts, so there’s a case to be made for the two coming together.

And Starz has been on a roll of late with original series such as “Outlander,” “Power” and comedy “Blunt Talk” generating some pop culture traction for the flagship channel. AMC Networks has long been viewed as a potential acquisition target for media companies because of its limited scale, owning the AMC channel, IFC, SundanceTV, WE TV and half of BBC America. AMC Networks’ $5.3 billion market valuation has been aided by a run of hit programs, both with audiences and with critics. “Fear The Walking Dead,” a spinoff of its hit “The Walking Dead,” drew the largest-ever audience for a new cable series with 10.1 million viewers last month.

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