The Great Sirius XM Conspiracy

| About: Sirius XM (SIRI)

If one were to read many of the comments on Seeking Alpha about Sirius XM Radio (NASDAQ:SIRI), they would probably come away with the perception that it is one of the most heavily manipulated stocks on Wall Street. Comments on a recent article included the following:

I'm not always looking for a conspiracy but if somebody wanted lower share prices for buybacks this would be the way to do it. If an increase in share price was the objective the price increase should have been deferred until early next year. Oh yeh, and lowered 2014 expectations along with the rest. I think [Liberty Chairman John] Malone and gang know exactly what they are doing.

For someone not looking for a conspiracy, why bring it up? Or, this one suggesting that management wants to drive down the price:

What if management is giving a conservative guidance, knowing that the market would push the stock price down, to help with the share buybacks?

And, while we're at it, why not beat up on the banks and analysts. After all, everyone hates the banks these days and even the leaders in Washington have decided to go after them.

Low and behold [Goldman Sachs] comes out with a downgrade from buy to neutral right before the first 10 buyback period begins next week. Yet yesterdays cc numbers were excellent. From what i read as well, if not for $107 million in debt/rifi fees siri would have had .03 eps instead of the .01 eps. Yet no one mentions that. This is nothing more than pure manipulation by gs, lmca/siri for the buyback of shares at a cheaper price.

Better not forget those that short the stock:

Reverse split this puppy 10 to 1 and get the shorts out of the game..

Finally, we need to consider the "arbs" and the recent $500 million Liberty Media (NASDAQ:LMCA) repurchase agreement with Sirius XM:

You see a purchase agreement with a range like that, expect the 10-day weighted average share price to be right at the bottom of the range and the stock to rise on the 11th day. Arbs know how to handle these situations.

If the SEC is listening, they will be very busy over the coming months.

Conspiracy Theory Flaw

My concern is that I can find little logic behind many of these ideas. Start with Goldman Sachs (NYSE:GS). The company had initiated coverage last December when the shares were below $3.00 with a price target of $3.50 and then during the summer raised the target to $4.25. The shares came very close to that price early last week when they reached $4.18.

One could argue that pre-earnings release would have been a good time to reduce its "buy" recommendation to "hold" based on valuation, or even to "sell" because the price had risen so close to their target. But why wait until after earnings and a price drop of more than 6% to $3.91? While I am not a fan of the banks, to suggest that Goldman is working with Liberty and Sirius to lower the price fails the sniff test on at least three counts. First, it brings the credibility of their analyst into question. It's bad enough that he got it wrong by not downgrading ahead of earnings, but why try to exacerbate the problem by downgrading after the price had started to fall - assuming that a Goldman downgrade would lower the price further.

Second, why would Goldman want to help Liberty while punishing its clients that had bought stakes in Sirius XM based on the buy recommendation? Third, what would Goldman, Liberty and Sirius XM gain from a lower price?

Who Benefits from a Low Share Price?

It is this last idea where most of the accusations of a conspiracy seem to fall apart. Clearly, with Sirius XM in the midst of a $4 billion dollar buyback - $2 billion announced last December, and another $2 billion announced earlier this month - the company and current shareholders should benefit if the company is able to buy more shares at a lower price. Unfortunately, the company's largest shareholder, and majority owner, Liberty won't benefit from a short term drop. In fact, a short-term drop hurts Liberty!

The reason is that Liberty recently entered into a $500 million share repurchase agreement with Sirius XM. The dollar amount has been fixed, but the number of shares won't be determined until an average price per share has been determined. The price Sirius XM will pay Liberty for the shares will be based on the average price of Sirius XM stock over the ten trading beginning tomorrow. The price Liberty will receive for its shares will be 98.5% of that average price, although the average price used will be subject to a minimum of $3.64 and a maximum of $4.18, regardless of the actual average.

So, although Sirius XM would benefit from a price of $3.64 or lower, Liberty benefits from a price of $4.18 or higher. The minimum and maximum number of shares would be:


$500 million / ( 98.5% x $3.64 per share) = 139,454,454 shares


$500 million / ( 98.5% x $4.18 per share) = 121,438,807 shares

Differential = 139,454,454 - 121,438,807 = 18,015,647 shares

As you can see, a lower share price could cause Liberty to sell 18 million more shares for the same $500 million total. Considering that the shares closed at $4.06 the day before earnings and guidance were released, those 18 million shares could have been worth more than $70 million.

It is difficult to disentangle Liberty and Sirius XM management and that's where this idea gets interesting. If one wants to claim a conspiracy, wouldn't it make far more sense for Liberty - which controls the Board of Sirius XM - to want aggressive guidance? It would be in Liberty's interest to have the average share price well above the upper bound. Not only would it look like Sirius XM is getting the shares at a bargain price from Liberty, but it would difficult to claim manipulation when Liberty is receiving less than the going market price its shares. Then, when the year-end numbers are released and Sirius XM releases full guidance for 2014, conservative guidance could cause the shares to tank. Then Sirius would be able to buy from non-Liberty shareholders for a lower price.


With hedge funds and banks getting caught up in a variety of scandals, it is not too surprising that some investors start to wonder if an external force is manipulating the stock in a company that they own. However, if you are going to invest in a company, wouldn't you want the management to be smart enough to construct a scam that makes sense? This one doesn't.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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 have no positions in the other companies mentioned in this article