Should Sirius XM Radio (SIRI) investors be thanking Liberty Media (LMCA) this holiday season? Liberty has been very busy buying up shares of Sirius XM since the beginning of the year. While Sirius XM employees and directors were cashing in their stock options and helping flood the market with millions of new shares of the company, Liberty has been soaking up the common stock at a far greater rate by spending more than $1.4 billion in its pursuit of acquiring a majority stake in Sirius XM.
Consider this: Sirius XM began the year with 3,753,201,929 shares. By the end of the third quarter, excluding the conversion of just under half of Liberty's preferred shares, the common shares had grown to 3,989,897,046 because of new shares issued as a result of options being exercised and new shares being issued to employees and employee benefit plans. Since the end of the third quarter, there have been more options exercised by insiders, adding another 30 million shares, bringing the total to 4.02 billion shares.
While Sirius XM was adding more than 266 million shares -- more than 7.1% -- to the float in 2012, Liberty was purchasing 653,943,552, or 17.42%, of those 3,753,201,929 beginning shares. Liberty has not only played a major role in reducing the supply of shares available to trade, but has also played an equally important role in increasing the demand. As anyone learned in high school economics, when either the supply is reduced or demand is increased, prices typically rise. The result with Sirius XM this year has been a 54% rise in the price of the shares from $1.82 to $2.80.
The share price increase is not just a simple case of a supply and demand imbalance caused by Liberty's actions. Sirius XM has also been successful in a number of areas:
- Was able to contain churn while increasing the base subscription rate on Jan. 1
- Expanded its efforts in the pre-owned car segment, signing up thousands of dealers and gaining hundreds of thousands of additional subscribers
- Paid off $1 billion of its 13% and 9.75% debt issues
- Should meet or exceed its 2012 guidance of net subscriber growth approaching 1.8 million, revenue approaching $3.4 billion, adjusted EBITDA of approximately $900 million, and free cash flow of approximately $700 million
What does the company do for an encore in 2013? While Liberty waits for approval by the FCC to go to de jure control of Sirius XM, Liberty probably won't be buying too many more shares. It is already less than 0.5% away from becoming a majority owner. However, it is widely expected that Sirius XM will pick up the slack by starting a significant share buyback.
Working against that buyback will be another flood of new shares hitting market. Once Liberty takes control of Sirius XM, a provision in the Sirius XM 7% exchangeable notes makes it likely that holders of those notes will convert them to common shares. That would add another 320 million shares to the float. After Sirius XM CEO Mel Karmazin's options to purchase another 30 million shares vest on Dec. 31, it can be expected that he will cash those in shortly afterward. It is reasonable to assume that there will be a minimum of 350 million to 400 million new shares offsetting a future share buyback.
This year, Liberty's actions had the net effect of reducing the shares available to other investors by approximately 0.4 billion shares. What effect will a Sirius XM share buyback have? Two key elements will work against the impact of a buyback. The first is that there will be the new shares as a result of the 7% note conversions. The second will be Liberty unwinding its purchase.
If Liberty wants to maintain its majority at the same time it recoups its investment from its recent purchases, it can be expected that it will participate in a buyback. The issue is that the 350 million to 400 million new shares would need to be purchased just to keep Liberty at 49%-plus before Liberty could begin to participate. And, that portion of the buyback would only get Liberty back to the position where it is today and get the comparable common shares back to 4.02 billion.
To get the common share count back to the level it was at the beginning of the year, Sirius XM needs to purchase another 266 million. If Liberty starts participating in the buyback at this point, that number needs to double to 532 million. Since these Liberty common shares have been "unavailable" to other investors and traders, a buyback of 900 million shares (the 532 million plus the 350 million to 400 million) still leaves Liberty holding the remaining 0.4 billion shares that actually reduced the net float in 2012.
It would be naive to assume that Liberty's share purchases had no impact on the share price of Sirius XM, and it would be equally naive to assume that it was the only impact on the rising price of Sirius XM shares. There were a number of events that had an important impact on share price that took place in 2012 that will continue to have an impact on 2013. The price increase will continue to be rolled out, although it will impact fewer incremental subscribers. The used-car program will continue to expand, although the growth in the program should also slow down. Debt reduction probably won't continue at the same rate, although the full year impact on interest expense will be much more meaningful.
Will a Sirius XM share buyback in 2013 have a major impact on the share price next year? Probably not, at least not in a noticeable upward price movement. It should, however, serve to negate the dilutive effects of the 7% notes and ongoing exercise of employee options.
It is difficult to see it having anywhere near the impact that Liberty's buyback has had in propping up the share price in 2012.
Disclosure: I am long SIRI.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position, as well as some $2 and $2.50 January 2013 and $2.50 December covered calls. I may initiate (or close) a buy stock/sell option position in SIRI at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.