It certainly did not take Liberty Media (LMCAD) long to exert its control over Sirius XM (NASDAQ:SIRI). The day after Liberty Media bought enough shares to take it over the 50% threshold, Liberty converted remaining preferred shares and installed a new Board of Directors.
Sirius XM filed an 8K with the SEC Tuesday outlining these substantial changes. The document revealed that Liberty Media holds a 50.21% stake in Sirius XM, that Liberty converted the remaining preferred shares into common shares, three more Board members resigned, and that Liberty installed a new Board members already.
One of the first questions investors may ask is how new Board members were installed without a shareholder vote. I have explained in the past that once over 50% Liberty Media would be free to insert a Board of its liking without a shareholder vote because it would be clear what the results of a vote would mean. With Liberty over 50%, it can exert its influence over Sirius XM by sheer voting power.
Sirius XM is now in a new era. The company is no longer an independent entity, but rather a controlled one. As of now, Liberty Media can officially pull the strings of Sirius XM. This is something investors need to be aware of.
Currently the likely desires of Liberty Media align with those of other shareholders. That should remain the case, but there is a possibility that the interests may not always align. For the time being we simply need to contemplate the most likely actions of Liberty Media.
The first desired goal of Liberty Media is to get back about $1.7 billion that it invested into Sirius XM common shares to raise its stake from 40% to just above 50%. To extract this money Liberty will be an active participant in share buybacks, selling shares in equal portion to other holders. This will reduce the share count but keep Liberty at a majority ownership level.
A second desired goal of Liberty Media would be to not spin off the high basis stock. High Basis stock are the shares that Liberty Media had to buy on the open market. Getting back the $1.7 billion mentioned above does not mean that Liberty will have sold back all high basis shares. Because of price appreciation, Liberty will sell back fewer shares to gain the required dollars. The average cost of Liberty Media's high basis shares is about $2.35. Essentially, at current prices, Liberty could still have 168 million high basis shares even after recovering the $1.7 billion invested.
In my opinion the second desired goal of not spinning high basis shares is contingent upon the growth Liberty sees at Sirius XM as well as other factors that could include a new investment opportunity for Liberty Media. If Sirius XM growth is tracking well, I look for Liberty to continue to participate in share buybacks until all high basis shares are sold back.
The third desired goal of Liberty Media is likely a spin via a tax friendly Reverse Morris Trust. This is well off into the future right now, but not something investors should lose sight of. If goals 1 and 2 are complete Liberty will still control Sirius XM, and do so with billions of shares that it essentially got for free. The timing of this is reliant upon the other two goals above. In order for Liberty to sell all high basis shares it will take a buyback of 1.4 billion shares. Sirius XM has already announced a $2 billion dollar share buyback. At current prices that would remove 633 million shares, or just 45% of what would be needed. As the share price increases the number of shares that can be bought through a buyback decreases. It can set up a very interesting dynamic.
In my opinion the key to Sirius XM right now rests in goal number 2 of Liberty Media. If you are long Sirius XM you want Liberty Media to attain goal number 2. This is because Liberty remaining in play with Sirius XM means that Liberty still sees great potential in the company that outweighs other opportunity.
Stay tuned, Sirius XM is in for interesting times ahead.