Liberty Media stock (LMCA) is down to nearly $141.50 after it became public that the media giant is proposing a stock transaction that would give Liberty control of Sirius XM (SIRI). The move, announced Friday after the close, has investors in both equities experiencing some confusion.
With the close on Friday, the "value" of the offer was about $3.68 per share of Sirius XM. What investors need to understand is that the offer essentially is a ratio that relates to the price of Liberty Media more-so than the price of Sirius XM.
The easiest way to assess the offer is to take the price of LMCA shares and multiply it by 0.0253. On Friday that came to a "value" of $3.68. At the current $141.50 price, the new "value" of Sirius XM shares (according to the current offer) is $3.58.
This proposed transaction needs to be approved by Liberty Media shareholders, the independent members of the Sirius XM Board of Directors and a majority of the minority of Sirius XM shareholders.
The easiest approval, for the current offer, would be the shareholders of Liberty Media. By many measures, Liberty would be getting a very good deal in obtaining Sirius XM for what is currently below market prices for Sirius XM. That component of the deal for Liberty shareholders is a "no-brainer." The part that Liberty investors will need to ponder is the concept that Sirius XM shareholders would essentially control 39% of the proposed Liberty Media class C shares. That is a big chunk of the new entity.
For Sirius XM's minority holders, the proposed price is likely not something that will sit well. Investors in Sirius XM would be shifting from a pure satellite radio investment to an investment that is more of a conglomerate. The new stock would include stakes in Live Nation (LYV), Barnes & Noble (BKS), the Atlanta Braves, True Position, Charter Communications (CHTR) and Time Warner (TWX), and Viacom (VIA). Essentially, many Sirius XM investors feel that a premium is due to them if such a deal were to move forward. In addition, holding non-voting shares in Liberty Media series C stock would make an investor an even more silent partner than they already are.
Liberty Media is in the midst of a battle to gain a controlling interest of Time Warner, and having an entire ownership of Sirius XM may be advantageous to the financials of Liberty. Sirius XM is a cash cow of sorts, and control of that would give Liberty a lot more latitude in how to move forward.
The way I see this playing out is as follows.
- Liberty will likely need to revisit its offer ratio in the near term.
- Sirius XM's independent directors will ask for a committee that will assess the value of Sirius XM in its current state, vs the value of the company moving forward. This committee will be "charged" with brokering the best possible deal for Sirius XM's minority stakeholders.
- Liberty Media, which essentially controls Sirius XM already, will continue satellite radio operations as has been happening in the past.
- Share buybacks that are already approved may or may not continue as this latest development is considered. In theory, there is a $500 million buy of Liberty shares of Sirius XM in the works, and about $1.5 billion in Sirius XM open market shares. That current ratio actually weakens the position of the minority. It may be considered that weakening the minority via buybacks that are not in proportion is not "kosher."
- Activist Law firms will be jumping into and inserting themselves into this process.
- Active traders will need to assess their positions relative to the ongoing process. Being short Sirius XM will appear very unattractive at times, but also could be very attractive at others. Expect big volume and big swings in the near term as the playing field digests these new dynamics.
- Options market activity could get very interesting as players begin to essentially place bets on the outcome.
- The actual fundamental performance of Sirius XM will begin to take a back seat to the opportunities (both bullish and bearish) created by speculation.
- Volume on LMCA and Sirius XM will be volatile. After the initial news settles in, investors should watch to see where the street is placing money.
The "play" here is not yet developed or determined. Investors would be wise to monitor LMCA and Sirius XM closely. My strategy, which I entered into long ago, was to split my stake between Liberty Media and Sirius XM. In doing this, I have removed some of the noise from the investment. There may currently exist a great opportunity for like minded investors to do just that in the near term, especially if you hold only Sirius XM stock at the moment. Since the announcement Sirius XM has traded substantially higher while Liberty Media has traded down. Remember, that initial reaction to news (both positive and negative) are usually overblown. In this case, it could be argued that Sirius XM has reacted too positively to the early news and Liberty media too negatively. An active trader might do very well in playing these dynamics.
There will be a lot that needs to happen prior to anything concrete developing. Keep your mind open. There is likely a good deal in here somewhere!