Sirius XM Radio (NASDAQ:SIRI) announced a $2 billion share buyback late last year. At that time, Liberty Media (NASDAQ:LMCA) had not yet received permission from the FCC to take control of Sirius XM, and to keep the buyback from pushing Liberty to over 50% ownership, the announcement included the following language:
Liberty Media Corporation, the beneficial owner of approximately 49.8% of the company's stock, has indicated that it will participate in the company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program.
On Jan. 3, Liberty received FCC approval to take de jure control and within the next two weeks purchased sufficient shares to go to majority, as well as took steps to install its own board of directors. While this was taking place, the buyback was on hold. During the February conference call, Sirius XM CFO David Frear made the following comments regarding the share buyback:
In our earnings release this morning, we announced that Liberty Media is not required to participate in our stock buybacks.
He later added:
Two things. When we announced the program in December, we were pretty close to earnings. And so the advice we had was to stay out of the market until we had gotten kind of the material nonpublic information into the marketplace, which I think we effectively do with this call and getting the K filed. You know, with respect to Liberty, when we originally announced the program Liberty was under 50%. We announced that they would be participating pro ratas so as not to accrete their ownership. You know, given that they've gone into the marketplace and they have gone over 50%, that there doesn't seem to be any structural reason why the board should, for instance, insist on their pro rata participation. So it's left to their discretion to participate in a manner that they feel is best for their business.
Feb. 4 was the day before the earnings announcement, and the buyback had not begun at that time. Did it begin between the announcement and the close of the first quarter? For the past four years, Sirius XM released first-quarter earnings during the first week in May. At that time, investors will find out whether any shares were purchased during the first quarter.
There have been a variety of interesting articles and comments on Seeking Alpha about the share buyback, whether or not it has begun, and its impact. Many think that the buyback has to be great because it will reduce the number of shares outstanding, result in greater earnings and free cash flow per share, create increased demand for the shares, squeeze the shorts, and lead to a higher share price. Even Frear seems to fall into that camp. On the call referenced above, he said:
Free cash flow per share is also growing at a rapid rate and it will grow faster as we begin to buy back stock. Based on our reported fully diluted shares and free cash flow, free cash flow per share grew from roughly 6.4 cents in 2011 to 10.3 cents in 2012.
Now, just for the sake of argument, if you assumed retire about 600 million shares in our $2 billion buyback program and assume our guidance of approaching $900 million in free cash flow for 2013, free cash flow per share would trend towards $0.15 or roughly 40% growth over 2012's level.
There are studies that suggest share buybacks often do not benefit investors. It should also be pointed out that even with the hypothetical buyback in Frear's comment, the rate of free cash flow growth has declined from more than 60% the previous year to "roughly 40%." The growth without the buyback would be to 13.6 cents (or 32%) - and possibly higher, depending on how much interest expense impacted the $900 million of free cash flow as a result of drawing down the revolver.
If it has begun, one would think Sirius investors should be overjoyed. After all, the price has declined 6% from the $3.17 closing price on Feb. 4. That means that Sirius XM has been able to buy back shares cheaply and the reduction in shares will be even greater than anticipated.
But if it has begun, why hasn't the demand driven the share price higher? And why haven't the shorts been squeezed?
I have made no secret of the fact that I am not a big fan of share buybacks, preferring dividends instead. However, Liberty likes share buybacks, and has bought back lots of its own shares. And since they are in charge, I am resigned to the fact that Sirius XM will be buying back shares, and lots of them. Probably close to 2 billion shares to allow Liberty to sell into the buyback, maintain control and eventually execute a Reverse Morris Trust.
From that perspective, if the buyback has begun and a significant number of shares were repurchased without driving the price higher, I view that as a good thing. And if that buyback has begun, my only question to the others who were expecting the buyback to result in a higher share price and a short squeeze is: "Did you get what you wished for?"