Merger speculation in the cable sector is heating up as the CEOs of Liberty Media (LMCA) and Time Warner (TWC) are rumored to have met up to discuss a possible merger in the cable industry. According to Barron's, Liberty's CEO Greg Maffei contacted Time Warner's CEO Glen Britt. Liberty Media holds a 27% stake in Charter Communications (CHTR) and is thought to be potentially increasing that stake. Interested outside parties could be Sirius XM (SIRI), the satellite radio provider that Liberty Media holds over half of the company stock in.
While most articles will focus on the cable side of this situation, there could be an interesting play for a savvy investor by looking at Sirius XM. The Liberty Media stake in Sirius XM equities to be about 3.3 billion shares with nearly 706 million of them being high basis shares. Essentially, liquidity for Liberty Media is not an issue at all. The company could borrow against the Sirius XM stake, or sell back shares in tandem with the current and ongoing share buyback program being conducted by Sirius XM.
Liberty Media has long stated that one goal with its investment in Sirius XM was to get back about $1.7 billion it invested to get its stake from 40% to over 50%. With Sirius XM buying back shares, Liberty will be able to sell back high basis stock in pace with the street and thereby maintain a 50% ownership level while at the same time getting back cash to fatten its proverbial wallet.
With Sirius XM trading at $3.25 Liberty Media could get back its cash by selling just 523 million shares. Sirius XM generates massive amounts of free cash flow, and combined with additional debt is capable of adding to the already announced $2 billion in share buybacks. In theory, once Liberty is ready to begin selling high basis shares, it could be in its best interest to make that intent known in a very public way. Should that happen, Liberty could drive the price of Sirius XM up, thereby having to sell fewer shares in order to gain back that $1.7 billion.
Essentially, investors in any of the companies mentioned need to focus on all of them. Consider the potential that it would be beneficial for Liberty to increase its stake in Charter before negotiating a merger with Time Warner. What if Liberty decides to forgo selling back Sirius XM stock and uses shares as a bartering tool? What if Liberty decides that cable is more attractive than satellite? There are many possibilities, but in my opinion Liberty holds the best cards. It simply boils down to how Liberty's John Malone and Greg Maffei want to play the hand.
For the average investor the key is keeping your finger on the pulse of Liberty Media. There is no rush here per-se. Mergers take time and could involve antitrust issues. Liberty Media is playing a game of chess, and they are thinking not three moves ahead, but six. Understanding the possibilities now can be very valuable for investors in the cable and satellite sector. Stay Tuned.
Additional disclosure: I have no position in Charter or Time Warner Cable.