With $300 million in annual cash flow and an Enterprise Value of $3 billion, $315 million in net cash on its balance sheet, content contracts for several years going forward and a slew of original series, Starz (NASDAQ:STRZA) will likely be bought out later this year.
As a shareholder of Starz (NASDAQ:STRZA), I cling to the hope that the company will merge with a well-run business where its assets will prove to actually be synergistic with the combined company’s business model going forward. The three companies discussed here are those that I believe would potentially work best with Starz (NASDAQ:STRZA).
A relatively under-appreciated aspect of TV shows in 2013 is the amount of viewers who begin to watch the show well online. I would never have watched shows like How I Met Your Mother, The League or Parks & Recreation if their episodes were not readily available for binge watching on Netflix, Inc. (NASDAQ:NFLX). Today I watch them all live and don’t miss an episode.
I was introduced to each of the Starz (NASDAQ:STRZA) shows I like when their content was on Netflix, Inc. (NASDAQ:NFLX) a few years ago. Unfortunately, it is no longer available there and because I do not subscribe to Starz (NASDAQ:STRZA) I must wait for the DVDs, pay exorbitant per-episode prices on Amazon.com, Inc. (NASDAQ:AMZN)/iTunes or do illegal things to watch the episodes.
Like Starz (NASDAQ:STRZA), Netflix’s original series (excluding the weird werewolf one) have come out to generally good reviews. If Netflix were to acquire Starz, it would simultaneously increase the amount of viewers who have access to its original series and increase and improve the content available on its site.
The problem is whether or not Netflix is financially capable of pulling off a deal. Netflix currently has about $300 million in net cash, not including off-balance sheet content deals. However, the deal would be immediately (and incredibly) accretive for Netflix shareholders if the company used stock. Despite Netflix having the $14.6 billion to $2.8 billion market cap advantage, Starz has net income and operating cash flow of around $300 million, vastly more than Netflix’s numbers around $20M.
Amazon.com, Inc. (NASDAQ:AMZN) has attempted to enter the subscription content business with its already-established Amazon.com, Inc. (NASDAQ:AMZN) Prime service. Amazon has also tacked on unlimited streaming of 41,000 movies and TV episodes, according to its website. I do not believe that the streaming content is much of an attraction to customers, as there is very little that is not available on Netflix.
Amazon’s streaming site is also incredibly plain and hard to search through, and the player that Amazon uses is prone to bugs and random stoppages. In addition, Amazon recently created fourteen pilots for possible original shows, none of which earned any real acclaim from fans or critics. The pilot for a show based on the movie Zombieland proved to be particularly disappointing after fans of the movie “hated it out of existence.”
Any way you spin it, Amazon has failed to produce anything of value in its content subscription business. Acquiring Starz would immediately bolster its available content, giving it titles that Netflix does not have available and give it another advertising chip to sell Kindles.