If you are not yet aware of the news, Sirius XM (SIRI) announced that it will be issuing a special dividend later this year and that the company would be dedicating $2 billion to share buybacks. That news was more than welcomed by Liberty Media (LMCA), the company that holds just under a 50% stake in the satellite radio provider.
Liberty Media stands to gain an impressive $164 million from the dividend alone, and that presents what may be a very interesting strategy for the media titan.
There has been a lot of discussion relating to the Liberty Media stake in Sirius XM. The issue has been brought up in lawsuits, comments, and articles covering both Liberty Media as well as Sirius XM.
Early this year Liberty Media began the process of increasing its ownership stake in Sirius XM from the 40% that the preferred shares represented to the current stake of just under 50%. Liberty has been strategic in its moves by using a combination of forward purchase contracts and open market purchases. So far, the company has spent about $1.5 billion in 2012 buying and increasing its Sirius XM stake.
Throughout the year Sirius XM CEO Mel Karmazin had stated that the oft discussed share buybacks would not happen because in doing so, the Liberty Media ownership stake would increase, and that the company did not necessarily want to help that process along.
Earlier this quarter Liberty Media, which has substantial control over Sirius XM because of its preferred shares, stated that it would participate in share buybacks on a pro-rata basis so as not to increase its ownership stake as a result of the company buying back shares. This strategy would seem to quell the fears of those that do not want Liberty to take over, regardless of the fact that Liberty gaining a controlling stake is essentially a foregone conclusion.
This morning Sirius XM announced not only a share buyback, but a special dividend as well. Interestingly, Liberty Media stands to gain about $164 million in dividends based on the preferred and common shares owned.
While it may be pure coincidence, the cash dividend that Liberty will receive would be enough cash to buy the required shares to take Liberty Media over 50% ownership in Sirius XM. Thus, while the ownership stake will not increase as a result of share buybacks, it could very well increase as a result of the cash Sirius XM pays Liberty Media in the form of a dividend. There is an old saying that there is more than one way to skin a cat. We now see the other way.
What will be very interesting is that Liberty Media will now have $164 million of "house money" to strategically buy Sirius XM shares at the very points in time when Sirius XM may be conducting buybacks. Essentially, Liberty Media would be selling into the buybacks on a pro-rata basis, to maintain the same ownership percentage, while using cash provided from the dividend to buy up shares that will in effect increase its stake percentage.
While many may not see it, or want to see it, these developments are good. We have seen Liberty Media defend the Sirius XM stock price with open market purchases, and now that ability will continue. In addition, Sirius XM itself can defend the stock price as well. Ultimately, these actions are accretive to the stock and carry a big positive for the equity moving forward.
The real wild card in this are the shares tied to the 7% convertible bonds. Those bonds can convert to about 293 million shares. In theory, in order to maintain a 50% stake, Liberty would need to be a buyer again if and when those bond holders convert. However, there is an answer for that as well. Liberty can utilize funds from any buybacks to again purchase shares. Consider the scenario below:
Sirius XM announces today that they will buy 100 million shares and does so at $2.80 a share. The company would spend $280 million, of which Liberty would get $140 million by selling 50 million shares. That lives within the spirit of the pro-rata agreement of the share buyback program. The following day Liberty Media takes the $140 million and buys 50 million shares on the open market. Effectively, Liberty would have just increased ownership levels without forking over any of its own money. Consider the implications:
- It is a foregone conclusion that Liberty Media will gain control of Sirius XM.
- Any announcement by Sirius XM to buy back shares may will be followed by Liberty Media conducting open market purchases of its own at a level 50% of what Sirius XM just bought.
- If Sirius XM buys back 100 million shares on one day, and Liberty buys 50 million the next, the stock will have effectively seen 150 million shares removed from the float instead of just 100 million. This is because, at least for the time being, Liberty is a holder of the stock and not a seller.
- Between the 293 million shares tied to the convertible bonds, and about 40 million shares to get to 50% ownership in Sirius XM, Liberty will conceivably still be a substantial buyer of this equity for many months to come!
Simply stated, Liberty is in a position where it can now gain control without having to shell out any more of its own money. This will take many months to play out, but the strategy is as sound as Sirius XM's business model.
If you are invested in Sirius XM or Liberty Media, don't fight the process. It is good for shareholders in both companies. There will come a day when Liberty might spin Sirius XM, but that is down the road quite a bit, and we will have plenty of time to monitor the direction Liberty decides to take.