As John Malone indicated Monday, Liberty Media's ( L) international operations show a lot of promise. But things don't seem as bright as they used to for one of Liberty's big stateside businesses.Programming costs at the company's Starz Encore Group of premium channels, already slated to substantially increase in 2004, will significantly climb in 2005, the company forecast Monday. That 2005 increase -- which the company hadn't projected in earlier filings -- means that any recovery at the flagging Starz Encore will be pushed back from 2005 to 2006 at the earliest, according to the analyst who caught the disclosure. The news confirms Malone's comments that the premium movie channel service, Liberty's third-largest programming operation, needs to make progress before it's an attractive mergers-and-acquisitions candidate. The disclosure also serves as a reminder of the power of Comcast ( CMCSA), the nation's largest operator of cable TV systems. Under an agreement that Comcast inherited when it bought AT&T's ( T) cable systems in 2002, Starz Encore was able to pass on programming cost increases to the AT&T Broadband systems. But after Comcast -- which was responsible for 24% of Starz Encore's revenue last year -- objected to the inherited terms, the companies ended up settling on
What isn't so reassuring is Liberty's new estimate that Starz Encore's programming costs will rise between an additional $125 million and $175 million in 2005. In Liberty's 10-Q for the third quarter of 2003, the company had merely said it expected programming costs in 2005 "will not be less than the 2004 costs." Fulcrum Global Partners analyst Richard Greenfield, who published a note Tuesday pointing out the estimate changes, sees the programming increase punishing Starz Encore's earnings before interest, taxes, depreciation and amortization. Not only will EBITDA drop 45% to $200 million in 2004 (in line with management's estimates), he says, but it appears that it could drop some 35% on top of that in 2005, to $130 million. That's "relatively minor" in the grand scheme of things at Liberty, says Greenfield, who has a neutral rating on Liberty's stock. But it fits in with his larger picture of the company -- and the media industry -- which is that its growth prospects, for the most part, lie outside the U.S. Liberty is "not a bad investment," he says, given assets such as its big holding in News Corp.'s ( NWSA) nonvoting "A" shares. (Liberty, which
recently traded in some of that nonvoting stock for voting shares, held a total of $7.6 billion worth of News Corp. shares at the end of December.) "This just speaks to why I'd rather pick out the public pieces rather than owning all of Liberty," says Greenfield. "Here's a private asset that's underperforming." Confirming Liberty's disappointing performance, Liberty on Monday announced a $1.3 billion noncash impairment charge, based on slower-than-forecast revenue growth.