Sirius XM : Liberty Media's Offer Is Attractive Despite $3.68 Offered

| About: Sirius XM (SIRI)

Today Liberty Media (NASDAQ:LMCA) made an offer to Sirius XM (NASDAQ:SIRI) shareholders. The offer, while it may appear complex, is simple at its core.

the terms by which Sirius public shareholders would become shareholders of Liberty in a tax-free transaction in which each share of Sirius common stock would be converted into 0.0760 of a new share of Liberty Series C common stock, and, immediately prior to such conversion, Liberty intends to distribute, on a 2:1 basis, shares of Liberty's Series C common stock to all holders of record of Liberty's Series A and B common stock to create a liquid trading market for Liberty's Series C common stock. (The foregoing exchange ratio would be equivalent to a 0.0253 exchange ratio prior to the distribution of the Liberty Series C common stock dividend.) Upon the completion of the proposed transaction, Liberty expects that Sirius' public shareholders would own approximately 39% of Liberty's then-outstanding common stock.

Essentially, Liberty Media is making an offer to Sirius XM shareholders that would convert their shares into Liberty Media class C shares. The class C Liberty shares exchanged would be equity only and will not have voting rights. Considering current shareholders of Sirius XM hold a minority stake in Sirius XM, this is not a significant change in status. What investors need to understand is the exchange ratio is calculated as an offering of $3.68 per share for current holder's stake in Sirius XM, or a premium of roughly 3% to Sirius XM's closing price of $3.57 on Friday, January 3rd.

Why I Don't Like The Offer

Many investors, including myself, are unlikely to find the offering attractive based upon the price of the offering. $3.68 reflects a premium to the current share price but also reflects a discount to recent highs seen by the stock. After what was arguably a slight disappointment in Sirius XM's Q3 call, the offering of $3.68 is 50 cents below the $4.18 hit leading into that same call. I know I am not alone in my opinion that the $3.68 offered is low considering the overall trend of the share price over the past year, and that somewhat of a higher offer is justified. Selling at pullback prices, where I would consider Sirius XM to be a buy, does not seem to be the best course of action.

In the grand scheme of things my opinion matters very little, but I would have been accepting of an offer of $3.85 and quite happy with an offer equivalent to $4.18 or above. Other investors may have differing opinions, and investors should understand that there will be period of negotiations during which a higher offer may be requested from Sirius XM or given by Liberty Media for the transaction. $3.68 represents the minimum offer. I would expect that negotiations may bring this offer up slightly at the very least.

Why I Do Like The Offer

First and foremost, concerns of any significant drops surrounding Q4 uncertainty and forward 2014 guidance uncertainty from Sirius XM in the future may be put on hold due to this offer. Offers like this can often present a floor under the stock at the offer price during negotiations, and $3.68 may become a relatively 'sticky' bottom, at least for awhile. For me, last year's purchase of January 2014 $2 calls will likely expire with a 50% or more gain.

Second, as a Sirius XM shareholder with Sirius XM being held in majority by Liberty Media, I understood that Liberty held all the control. Essentially folding Sirius XM into Liberty Media gives me a premium to the current share price and automatically places me as a non-voting holder of Liberty. Since I had considered manually selling my Sirius XM stake and buying into Liberty Media itself instead at the beginning of 2015, this does what I had already intended to do, even if it is a bit early. I also will likely receive a premium in the transaction vs. having sold my stake in Sirius XM and purchased shares of Liberty Media recently.

While this does remove my investment from a 'pure play' in only Sirius XM, and changes it to an investment in Liberty's large numbers of holdings, Sirius XM remains the largest holding on a percentage basis and investment in Liberty Media will be the only way to invest in Sirius XM if the deal is approved.

Upon the completion of the proposed transaction, Liberty expects that Sirius' public shareholders would own approximately 39% of Liberty's then-outstanding common stock.

That's very important. Why? Because when it is understood that Sirius XM is currently held 52% by Liberty Media, and the other 48% will become 39% stake holders in Liberty Media on conversion, some rough calculations show that the resulting Liberty Media's market cap will be over 80% based on Sirius XM.

That Liberty Burger I talked about back in 2012, where the 'meat' was Sirius XM remains the same. Though the pure play option of buying just the meat is removed, to many owning the entire 'burger' may be preferable going forward.

Why? Flexibility. As stated in the release :

The proposed transaction is an important step in the growth of both companies," said John Malone, Liberty's Chairman. "It will enable us to focus our energies on the pursuit of new opportunities across the expanded portfolio of Liberty's businesses and to optimize our capital structure to produce the maximum possible returns to all shareholders.

Obviously it remains to be seen what Liberty's intents would be, but it seems unlikely that this is a quick flip and spin maneuver intended to cash out of Sirius XM. The often discussed Reverse Morris Trust or RMT where Sirius XM is spun out of Liberty seems unlikely at present as, given the percentage of Liberty that is Sirius XM, the amount this would shrink Liberty Media (roughly 80%) would likely remove some of the advantages of the currently larger Liberty Media.

Investors will need to make a decision whether or not they wish to cash out at present levels or if they feel this offer presents opportunity for them in the future. It is likely that this 'deal' will be passed at an agreed upon price, whether that be the offered $3.68 or more, and that current investors in Sirius XM will be future investors in a larger Liberty Media of which 80% or more of the value is due to Sirius XM.

Obviously, current investors should be comfortable with Liberty Media as well as John Malone. Current investors understand that Liberty already controls Sirius XM and Malone already controls Liberty Media. The financial flexibility this offers Liberty and thus its stake in Sirius XM going forward should be attractive to current holders of Sirius XM.

I will be holding my shares as well as my options going forward. I expect a better exchange ratio to be negotiated and thus a higher price for my shares upon eventual conversion. I see the probability of this 'deal' being accepted as extremely high and bordering on inevitable, so at this point discussions of whether or not this deal will go through, to me, seem like a waste of time and energy.

The question going forward will be "how much" the deal will go for. Sirius XM shares have since resumed trading after the halt, and are currently going for $3.75, a 7% premium to the closing price on Thursday. That's a good start.

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: I am long SIRI January 2014 $2 and $3.50 calls. I am long SIRI January 2015 $2 and $2.50 calls.