Most investors in Sirius XM Radio (SIRI) are aware that its largest shareholder, Liberty Media (LMCA) is controlled by billionaire John Malone. This is despite Malone holding a mere 2.2% of the LMCA common stock. The reason is that Malone also owns 88% of the LMCB shares, and thus controls well over 40% of the voting power.
Investors are also likely to be aware that over the past year Malone has been aggressively buying shares in companies other than Sirius XM (which he took control of during the first quarter of 2013). During that time, Malone was using another of his Liberty companies - Liberty Global - to acquire stakes in Belgian and UK cable companies and may have an interest in Germany as well.
After taking control of Sirius XM, Liberty Media made a major investment in domestic cable company, Charter Communications (CHTR), the nation's fourth largest cable operator. Malone paid $2.6 billion to acquire a 27.3% beneficial interest. To fund the purchase, Liberty Media used:
...cash on hand of $1.2 billion and borrowed $1.4 billion under newly executed margin loans on 20.3 million Charter common shares , 720 million SiriusXM common shares , 8.1 million Live Nation Entertainment common shares (NYSE: LYV) and a portion of Liberty's available for sale securities.
And, Liberty doesn't appear to be ready to stop with Charter. Reports that Malone was trying to acquire Time Warner Cable (TWC) began circulating in June. At that time it was estimated that Time Warner cable could cost as much as $37 billion, more than the combined value of Charter and Liberty Media. And today, Bloomberg reported that privately held Cox Communications, Inc. - the nation's third largest cable company - is interested in a business combination with Malone.
It is expected that consolidation will improve the leverage of the cable companies with content providers. Earlier this week CBS's (CBS) disagreement over rates made headlines as Time Warner threatened to shut off CBS in three major cities. This is not the first time disputes over rates have been readily apparent to local viewers in the greater NYC area. Announcements by FOX, ABC or SNY would instruct subscribers how to contact providers like Cablevision or Comcast (CMCSA) to keep their particular content with messages scrolled across the bottom of the screen.
If combinations are needed to improve leverage, where will the money come from? Sirius XM is the single largest asset held by Liberty Media, with nearly 3.3 billion shares valued at approximately $12.5 billion. Margin loans won't allow Liberty to access the $12.5 billion and its ownership interests don't allow it direct access to the Sirius XM cash flow. Will Cox and Charter combine and jointly pursue Time Warner Cable?
As Malone's interests appear to be turning more and more back to cable television, the question could become how can he fully monetize that Sirius XM asset? The Liberty Media conference call that takes place next Tuesday might provide more insight. More likely, it will simply raise more questions.
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. I hold no positions in the other companies mentioned in this article.