The other day a Seeking Alpha reader, pgourley, alerted me to an interesting article posted over at Reuters about a move that John Malone's Liberty Media (LMCA) recently made. I believe this has rather important implications for holders of Sirius XM (SIRI).
To explain, let's take a look at the basic idea of that Reuters article titled "Margin loan helps fund Charter stake purchase."
"Liberty Media on Monday entered into a definitive agreement to purchase 26.9m shares of Charter, as well as 1.1m warrants, from Apollo Management, Oaktree Capital Management and Crestview Partners for US$95.50 per share, a 6% premium at the time.
A portion of the total consideration is expected to come from a combination of "cash and new loan arrangements," the companies said in a statement. The purchase is expected to close early in the second quarter of 2013.
Charter Communications shares closed Thursday at US$102.36, 7.1% above the agreed upon purchase price. Assuming a 70/30 split of cash and leverage, Liberty Media has returned about 10.3%, excluding the costs of the margin loan and any value to the warrants."
That's a lot to take in, and to understand what I am trying to say here it is only necessary to grasp the concept of what a margin loan is:
"A loan from a broker to a client that essentially functions as a margin account. The funds may be used for any purpose, and the loan is secured with securities owned by the client."
I purposefully chose the most basic and simple definition here for a reason. It does not need to be made complicated. We don't need to look at the nitty gritty specifics here to understand one very important thing.
Liberty Media's market capitalization allows Liberty Media to access cash by leveraging Liberty Media.
And why is this critical for holders of Sirius XM? Because if you have the jitters that majority owner Liberty Media will be in a hurry to over leverage Sirius XM in order to buy back Liberty's high basis portion of its take stake so that Liberty may perform a Reverse Morris Trust, your worry may be misplaced. You may find comfort in the understanding that Sirius XM's contribution to Liberty Media's market cap gives Liberty Media some very serious leverage.
It all goes back to a year ago when I suggested that Liberty Media was a burger, and Sirius XM was the meat. I was laughed at during that time by some, but the fact of the matter still remains. The vast majority of Liberty's market cap comes from its holdings in the satellite radio provider.
If Liberty Media were to run a high leverage cash grab on Sirius XM, pulling out 10% of its stake to return capital, and then spinning out the company in a Reverse Morris Trust, Liberty would shrink its market cap considerably.
You can't take a margin loan on equity which is no longer there.
John Malone is no fool. You don't get to be one of the world's highest net worth individuals by accident. With Sirius XM as the lion's share of Liberty Media's worth, he will not be any hurry to grab a billion or two and spin Sirius XM free and clear. Sirius XM can indirectly lay golden eggs for Liberty Media, margin loan style, so long as it remains in Liberty's barn.
As Sirius XM trades sideways in narrow fashion, and as some try to make news out of things that aren't news at all, just keep what I have written here in mind. You don't slaughter the golden egg laying goose for its meat. Liberty Media will be in no hurry to rid itself of Sirius XM.
That's something that should be very important for Sirius XM investors to remember from here on out.
Additional disclosure: I am long SIRI January 2014 $2 calls.