Sirius XM Radio (SIRI) announced Q4 and 2012 annual results on Tuesday. Revenue for 2012 was $3.4 billion, up 13% from 2011. Net income for the year was $3.5 billion or $0.51 per diluted share, compared to $427 million or $0.07 per diluted share in 2011. And even though Q4 revenue missed some analyst's expectations of $898 million, it was still up 14%, and it yielded more than double the net income, which was $156 million or $.02 per share, compared to $71 million, or $0.01 in the fourth quarter of 2011. The adjusted EBITDA was $230 million for Q4 2012, up a whopping 38%. But, buried within the press release, way down at the bottom, was a huge piece of news concerning Liberty Media (LMCA), which I have highlighted:
As Sirius XM commences its previously announced $2 billion share repurchase program, the Company expects to repurchase shares of common stock from time to time on the open market and in privately negotiated transactions. Liberty Media Corporation, the beneficial owner of approximately 50.2% of the Company's stock, is no longer required to participate in the share repurchase program on a pro rata basis and has indicated it may or may not do so in the future.
This is completely different from the press release on December 6 which said that Liberty would participate in the buyback on a "pro rata" basis. This meant that it would sell into the buyback to maintain its ownership at under 50% at that time. But as I warned investors in several comments, this promise from Liberty was solely to appease the FCC. Once the company received approval to go over 50% ownership, it would not be bound to any agreement concerning its participation in a buyback for the sole purpose of maintaining a certain percentage of ownership.
What does this mean? This gives investors a clearer picture of the share repurchase program. Before, many thought that Liberty would try to bump up the share price to sell into the buyback. But now it looks like the company considers the price to be too low. Why sell shares for $3.15, when the price could double in two years? So those "bait" shares that were used to acquire Sirius may not be for sale at current prices. On the Tuesday Conference Call, Bank of America Merrill Lynch analyst Jessica Cohen asked for a "timeframe" on the buybacks:
Jessica Reif Cohen - Bank of America Merrill Lynch First, on the buyback, are you willing to commit to a timeframe? You're so far below your leverage target. I was just wondering, now that you're going to start it, is there any timeframe that you can offer?
Jim Meyer No, I don't think we're going to come out with a timeframe. We don't want to compete against ourselves in the market.
So all of this means only one thing: Sirius wants to get the cheapest price possible for its shares without any competition. The company, and investors, including Liberty, will benefit in the long run from a lower share price. If the buyback averaged $3.30 per share, Sirius could repurchase 606 million shares, or around 9% of its 6.6 billion diluted shares. However, if the stock were to dive to $3, that same $2 billion would buy 667 million shares, or 10.1% of the shares. So, the lower the price goes, it will be a win for the Longs. But do not expect it to drop before the options close in ten days. There are still a lot of open short positions that must be covered by then. Right now the latest number remains at 379 million shares sold short. The new short interest should be out in six days, and if it does not drop, shorts will continue to fuel the price jumps.
Many have speculated that a big portion of the short interest is from the 7% exchangeable Notes. Sirius recently filed a "Tender Offer Statement" with the SEC to exchange the notes for shares up until 10 AM "New York City Time", March 1, 2013. Some analysts warn that these new shares will cause more dilution, which will drop the share price, while others think this will strengthen the price by taking more debt off the books. I personally think the latter is correct. The buybacks will clean up the dilution. And if the price does drop, Sirius can buy even more shares. There is a built in safety net. A definite win-win.
As many predicted, the shares fell (premarket) to $3.11 during the Tuesday call, on the "traditional" Sirius XM "Buy the Rumor, Sell the News." But, keep in mind, this will only be a win for those who don't sell right now. As I have said numerous times, I expect the share price to go to $3.65 when the first buyback is complete. But there will be some dips along the way. Because the company is wanting to buy shares at the lowest possible price which will create a major tree shake. My advice for February is to hold on tight. And actually, the fact that Liberty may keep all of its shares could be good for the share price in the long run. This means that all of the buyback may have to come from the float, which will shrink as the shares are retired.