The long anticipated quest by Liberty Media (LMCA) to garner FCC permission to gain control of the Sirius XM (SIRI) licenses is finally over. While the outcome was never really a question, the timing was. With answers now in hand, the street can begin to decipher some of the events that will transpire in the months ahead.
Getting this FCC permission allows Liberty Media to move forward, increase its stake in Sirius XM to above 50%, convert the remaining preferred shares into common shares, install a Board of Directors that it see fit, and eventually move on to a spin or Reverse Morris Trust. It is all coming together.
Liberty Media had promised the FCC that it would convert preferred shares into common shares within 60 days of approval. This means that by early March we will likely see the existence of preferred shares evaporate. However, prior to that move I would speculate that Liberty Media will first take its overall stake above the 50% threshold. This could happen any time, and investors should be ready for it by developing a strategy now.
Ironically Liberty Media recently received a substantial sum of cash (as did all shareholders) in the form of a 5 cent special dividend. Essentially this means that Liberty can spend the dividend cash to take its stake over 50%. Kind of funny how that works. Fret not ... each and every shareholder could do the exact same thing with their own dividends, although individual shareholders are not in a position to gain control of the company.
I anticipate that Liberty Media will make its share purchase move in the open market and will do that sooner rather than later. There are still many moving parts, but there is also a 60 day time-clock ticking on the conversion of preferred shares. The big question is whether Liberty will do it al at once or take control now. As stated, I believe Liberty will move earlier rather than later and seek control before the 60 day conversion date arrives. Taking control now opens up options for Liberty and allows it to begin the process of actually controlling events at Sirius XM.
Investors need to bear in mind that the plan of Liberty Media will take time. Liberty still desires to sell back some $1.5 billion in shares that it already purchased on the open market and through forward contracts. Even though Sirius XM did announce a $2 billion share buyback, that would represent only 66% of the $1.5 billion that Liberty is seeking to get back, because in theory Liberty will only participate in about half of the $2 billion. Essentially Liberty will want to extract that cash prior to doing a spin or a Reverse Morris Trust. Thus, the eventual end game for Liberty Media could be as much as 24 months away. Even while maneuvering is still happening.
As long term investors know, the role of CEO at Sirius XM is being filled on an interim basis by James Meyer. While it is possible that Meyer stays on in that role, we also need to consider that another change could be in the cards. Once Liberty gains control it can install a Board of Directors of its own choosing (it will have over 50% of the votes). The current Board already has Liberty members installed and Liberty's Greg Maffei is in charge of the CEO search committee. It made sense to announce Meyer, a long time Sirius XM employee, as interim CEO with the departure of Karmazin. The question is whether it makes sense to keep Meyer in the longer term. We should know these answers in the coming months.
So here we are with Sirius XM above $3.00 for all of 2013 thus far. We have the news that Liberty has permission for control, and we know that Liberty will be converting preferred shares into common in the next 60 days. How does an investor play this? There is no right or wrong answers, but there are some compelling things to consider and watch for:
- 2012 auto sales results. The sales were very good and possibly enough to allow Sirius XM to pass 2 million net subs for the year.
- Speaking of subscribers, it is quite possible that the company announces a number soon. If the company was able to beat 2 million it would be compelling news.
- With a new year comes the desire for some 2013 guidance. Sirius XM is speaking at an investors conference next week. The company may well give the Street some guidance to work with. Being on a solid footing, this guidance should be well received.
- While Sirius XM did fail in delivering personalized radio in 2012, such an announcement should come soon. Perhaps at the Consumer Electronics Show.
- The company has approved a $2 billion share buyback program. This means that Sirius XM has the ability to defend its stock price.
- Short Interest has been creeping up and in fact is a long time highs. If a perfect storm of sorts falls into place it could cause a bit of a short squeeze.
- Liberty Media should be in the market to spend that special dividend money on some shares to take it over 50% ownership.
All in all there are quite a few positives that are possible. The company could have some well timed announcements that move the equity. Then again, on the opposite side of the equation, we could see a bit of a news drought and the equity could drift. My strategy ... be prepared for a run and content with a drift because overall 2013 is setting up nicely for this equity.