Liberty Media (NASDAQ:LMCA) seems to always find a way to score a big pay day one way or another. The latest is a $164 million dividend that the company stands to get from a special dividend announced by Sirius XM (NASDAQ:SIRI), a company that Liberty holds over a 49% stake in. The beauty of this is that it is just the tip of the iceberg when it comes to the Liberty investment into the satellite radio provider.
Back in 2009, with Sirius XM on the brink of bankruptcy, Liberty Media stepped up to the plate and provided Sirius XM with a bit over $500 million in much needed financing. The loan carried a hefty 15% interest rate, and cost Sirius XM about 40% of the company in the form of preferred shares. Within 6 months Sirius XM repaid Liberty Media on the loan, but Liberty retained the preferred shares.
The Liberty Media preferred stake equated to 2,586,976,761 shares of Sirius XM common and the cost of those shares was a meager $12,500. Since that day Liberty has increased its stake to almost 50% of Sirius XM through forward purchase contracts and open market buys. All told, Liberty now holds what equates to 3,248,666,969 shares of Sirius XM.
At the end of this month each of those shares will get a special dividend of $0.05. That represents an impressive $164 million pay day. Consider that Liberty paid about $0.000005 per share in the preferred stake and the $0.05 dividend already represents a massive profit on the loan that Liberty provided to Sirius XM. The beauty is that as impressive as it looks to turn $12,500 into $164 million, consider what will happen if Liberty does a Reverse Morris Trust and spins its Sirius XM stake. On a market cap basis the preferred stake alone is worth $7.4 billion. As stated, this payday is just the beginning.
Liberty Media has been very strategic in its moves relating to Sirius XM. The company has invested about $1.5 billion to increase its stake to approach 50% and actual control of the satellite radio provider. Upon FCC approval, Liberty will move over 50% and the final stages of this 3 year plus investment will be set into motion.
Liberty Media has stated that it desires to get back the $1.5 billion invested into common shares to get from 40% ownership to 50%. That process has begun as well. With the dividend Liberty stands to get back $32.8 million, but that is chicken feed compared to the other aspect of the announcement made by Sirius XM today.
Sirius XM also announced a $2 billion share buyback program. Liberty has agreed to sell in lock step with the market so as not to increase its ownership stake. An increase in ownership will come later. Simply stated, that means that of the $2 billion announced by Sirius XM, an impressive $1 billion is headed in the direction of Liberty Media. This effectively allows Liberty to get back a big chunk of the $1.5 billion invested without sacrificing ownership stake. Impressive to say the least. All told, between the dividend and buyback, Liberty will see about 77% of its investment back. Consider that the common shares purchased (excluding converted preferred) had an average price of $2.286 per share and the current price is at about $2.80 and you see another $0.52 on top of that. That appreciation in common share price carries a value of $341 million. Ironically, at $2.80 or so Liberty has now gotten back the $1.5 billion it was seeking. That is arrived at by adding $1 billion in buybacks, $164 million in dividends, and $341 million in common share appreciation.
By the time the first share buyback of $2 billion is complete, Liberty Media will have created massive value for its shareholders with what will once again equate to a $12,500 investment. Liberty will have recouped monies invested, gained a controlling interest in Sirius XM, and see that value grow prior to a spin that many feel could happen in the next 2 years or so.
Liberty Media is just beginning to create value for its shareholders. Stay tuned.
Disclosure: I am long LMCA, SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.