With Sirius XM's (SIRI) $2 billion stated buyback in full swing, investors have been looking for signs that over 50% owner Liberty Media (LMCA) may begin selling back some of its high basis shares in tandem with open market purchases.
The reason? Liberty Media has made statements alluding to the fact that it would like to get the cash back on the shares purchased to go to control of the satellite radio operator. Liberty Media spent a significant amount of its cash in order to fund the purchase of over 10% of Sirius XM to bring it to a controlling stake.
While Liberty may see fit to spin out Sirius XM in the future, it would be unlikely to spin out that cash. It's like giving a car to someone with a trunk full of money. Doesn't make much sense. Much better to pull that money out before you hand off the car and keep the cash for yourself. Besides, Liberty may use some cash to pay off its current margin loans taken against its Sirius XM stake.
After shares have been held for one year, they pass into friendlier tax territory and sales would be taxed under long term capital gains rates. Because of this many investors have been watching, and waiting, for the day to come when the bulk of Liberty's shares hit that magic 1 year mark. It's common expectation that Liberty will wish for the share price to be higher, rather than lower, when it decides to begin selling those shares back.
As of July 6th, the largest lot of Sirius XM shares which Liberty purchased, 302 million shares, will reach that 1 year turning point. You will notice the transaction is listed as "other" due to the purchase being made through a forward contract and not in the open market.
One other lot of shares has also passed the 1 year mark.
This gives a total of over 362 million shares which will have exceeded 1 year of age come Monday's trading. Is an announcement around the corner that Liberty will commit to selling back some or all of these shares?
Given that Sirius XM announced it had repurchased 209 million shares as of its first quarter report, and with expectations that it has continued the program since then, it is reasonable to assume that enough shares have been purchased to date to allow Liberty Media to sell all 362 million shares back without dropping under a 50% controlling stake. Investors should pay attention from here forward, as a very large purchase like this can remove 5% of the shares outstanding in one fell swoop. If the street likes the purchase price, expect shares of Sirius XM to jump as they did in response to the first quarter conference call. Investors should keep in mind that a jump should be proportional here. 5% is less than 18 cents at current share pricing. Do not expect a sudden rocket to $5 per share.
But even expectations that 18 cents of activity may be coming could be contributing to the $100 million reduction in short interest that Sirius XM has recently seen, as shorts covered at or near $3.50 per share. Expectations of a leap in share price mean that being short Sirius XM is a "risk on" venture. Certainly not for the faint of heart, and I continue to believe that the right side of trade here is the long side of the trade.
Additional disclosure: I am long SIRI Jan 2014 calls from $2 to $3.50 strikes. I own covered $4 calls against these positions.