Starz (STRZA) was spun off in unique way from Liberty Media Corp. (LMCA), in a way that won’t cause it to necessarily have a tax liability if it merges with another company, leading Jonathan S. Vyorst, Senior Vice President at Paradigm Capital Management to invest in Starz and include it in its special-situations portfolio.
“[Starz] was spun out from Liberty Media, and what was interesting about the way it was done from a legal perspective is that Liberty Media didn’t spin out Starz — Starz actually spun out all of the other assets of Liberty Media. That’s significant because spinning off a company is a tax-free endeavor,” Vyorst said.
Vyorst says the tax concerns may be at the center of why LMCA chose to handle the spin-off in this way, making Starz a more attractive buyout target candidate. Vyorst says special situations are an old and important part of value investment, and he says corporate transformations such as mergers, acquisitions or a restructuring are other situations which may present opportunities.
“If the spun-off company is bought within two years, then you have a tax liability. On the other hand, if the original company merges with another company, there is not necessarily a taxable event. So it seems that Liberty Media’s intention was to sell Starz in a tax-efficient manner, and that’s why it effected the spin-off the way it did,” Vyorst said.
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