On December 30th, 2011, Liberty Media (NASDAQ:LMCA) entered into a forward contract to purchase more than 300 million shares of Sirius XM Radio (NASDAQ:SIRI) at an average price of $2.15 as it began its efforts to take control of Sirius XM. At the time, the shares were trading at $1.82. Over the next 13 months, Liberty would purchase nearly 706 million shares at an average price of $2.35 per share. Liberty went to majority ownership on January 15, 2013 when it purchased 50 million shares at an average price of $3.1556 per share.
From the time Liberty entered its first forward contract until taking control, the shares of Sirius XM rose more than 70%. Sirius XM performed well during 2012 when it was able to control subscriber losses as it implemented a 12% increase in the basic monthly subscription fee, and increased total subscribers by just over 2 million. That performance was surely one factor in driving up the price. Arguably, Liberty was another major factor in driving the price of the stock higher as it removed 0.7 billion shares - or more than one fifth - from the publicly available float.
The Sirius XM Share Buyback
By now investors in Sirius XM know that Sirius XM has started a $2 billion share buyback program. The program was announced in December of 2012, although, as it turned out, the actual buying of shares was not to begin for another three months, or until after the release of the 2012 year-end earnings. On that conference call, Sirius XM CFO David Frear stated:
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.
There was also a change in the structure of the program since it was first announced. Initially, Liberty had agreed to participate on a pro rata basis. This agreement was to prevent Liberty's ownership from exceeding 50%. During the conference call, it was also disclosed that since Liberty had become a majority owner, "that Liberty Media is not required to participate in our stock buybacks." These events, along with an update on the buyback program, were discussed during the first quarter conference call.
On February 4th the price of Sirius XM closed at $3.17. Following the February 5th call, Sirius XM repurchased 157,183,759 during the rest of the first quarter and increased that number to 209 million shares by April 26th. The total cost to purchase the 209 million shares was not disclosed, although there are some data points that will allow for an educated guess.
The first quarter 10Q shows that 157,183,759 shares were purchased for a cash cost of $493,635,000, or an average price of slightly more than $3.14 per share. (Interestingly, while these purchases were taking place between February 5th and the end of March, the share price did not rise, closing at $3.08.) It is also known that Sirius XM spent less than $673 million to acquire 209 million shares. We know this because CEO James Meyer had stated:
As of Friday, our total share repurchase to-date have reached approximately 209 million shares, including the special dividend of $327 million we paid last year - late last year, we're proud to note that we have returned nearly 1 billion in capital to our shareholders since the end of last year.
Or, "nearly" $1 billion minus the $327 million dividend leaves less than $673 million for the purchase of the 209 million shares. That statement was consistent with the following statement by Meyer when he continued:
We have over 1.3 billion of remaining capacity under our share buyback authorization.
We don't know precisely how much more than $1.3 billion remains or how close the "nearly $1 billion" is to $1 billion. We do know that the average prices for Sirius XM shares from the end of March through April 26th were below the $3.14 average price paid in the first quarter, and traded below $3.00 more often than above $3.15. So, if we look at the 52 million shares purchased from April 1st through April 26th (209 million total less the 157 million purchased in the first quarter), and use an upper price boundary of $3.15 and a lower price boundary of $3, we find that the cost for those shares is between $156 million and $164 million. That $8 million difference will be considered insignificant in the scope of a $2 billion share buyback program, and choosing the midpoint of $160 million would allow us to assume that the company had spent $654 million and that $1.346 billion remained as of April 26th.
The $1.346 Billion
Stock prices are influenced by many factors, but in the end, it comes down to supply and demand. Liberty's purchase of nearly 706 million shares for $1.659 billion was most likely a significant factor in driving up the price of the Sirius XM stock as it both created demand and removed supply from the market. The $2 billion buyback should also have some effect on supply and demand.
The share price of Sirius XM has risen since the status update through April 26th when the shares closed at a price of $3.12, and the shares have risen sharply since closing below $3.00 just seven weeks ago. Recently the shares closed at $3.58, nearly 20% above that mid-April $3 price. Since the beginning of May, the shares have closed above $3.30, since May 13th, at or above $3.40, and since May 17th at or above $3.50.
How many more shares will Sirius XM be able to repurchase with the remaining "more than $1.3 billion"? At a price of $3.58, the $1.346 billion would be able to purchase 376 million shares. Will Liberty remain on the sidelines while this buyback continues or will it wait until a new buyback is authorized before beginning to unload some of its high cost basis shares?
The Liberty Effect
We have only recently passed the one year anniversary of Liberty's first open market purchase of shares of Sirius XM. It was from May 8, 2012 to May 9, 2012 when Liberty purchased 60.35 million shares. I am a bit surprised that we have not already seen Form 4's filed by Liberty indicating that it has sold shares of Sirius XM into the current buyback program.
This means that all 209 million shares purchased by Sirius XM came out of the publicly available float. If Liberty had been participating on a "pro rata basis" as initially agreed, one of two situations would have occurred. Either double the 209 million shares would already have been repurchased, or, if the same dollar amount had been spent, only 104.5 million shares would have been removed from the available float. By remaining on the sidelines, Liberty has continued to have an effect on the price of the shares of Sirius XM.
When Liberty first started to acquire shares of Sirius XM late in 2011, it was removing supply from the publicly available float. Now, while Sirius XM is repurchasing shares under its current $2 billion buyback, Liberty's choosing to not participate on a pro rata basis increases the number of shares currently being removed from the float.
To the extent that the law of supply and demand affects the price of the shares of Sirius XM, both Liberty's purchase of nearly 706 million shares and its inaction of not selling into the current buyback have helped to boost the price of Sirius XM shares.
Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against many of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis.