It is no secret that Liberty Media (NASDAQ:LMCA) is in the midst of attempting to take over Sirius XM (NASDAQ:SIRI). The issue has been widely covered and debated. The dynamics surrounding the Liberty offer changed the very moment the company went public with its intentions, and the gap between what is thought to be a reasonable deal and the offer is fast becoming a chasm. This dynamic has less to do with Sirius XM stock moving up and more to do with Liberty Media stock tumbling.
What investors need to bear in mind is that the "offer" is a ratio based on the price of Liberty stock as well as Sirius XM stock. In simple terms, the price ratio was 0.0253% of the price of LMCA stock. When the deal was announced, it established a "valuation" of Sirius XM shares at $3.69. With Liberty now trading at $136.26, that "valuation" is now at $3.44. This is a full quarter ($0.25) lower than we were say just over a week ago when the deal was announced. What needs to happen now?
In the minds of most, Liberty needs to sweeten the deal a bit to garner more certainty of a favorable outcome when the issue is put to vote amongst the minority shareholders. With that being said, one of the first things Liberty should do is develop an informational campaign that sells its concept to Sirius XM shareholders.
As someone that has a website dedicated to satellite radio, I can tell you first hand that there is a lot of confusion. Confusion amongst a very passionate investor group is not always a good thing.
There are many investors that think that this transaction is an end-game of sorts. That Liberty needs to pay a premium based upon the potential of Sirius XM two, three, or even five years out. The reality is that these Sirius XM shareholders will still have stock, albeit not a pure satellite radio play, that should perform in a manner representative of what satellite radio would have done anyway. There is discussion about the Net Operating Losses (NOLs) and their value. Again, these will still be utilized no matter what the ownership structure (so long as it is either Liberty or Sirius XM).
I have seen some rush to the judgment that a "no" vote is what they will do, without having even heard the response from the Sirius XM independent directors or a differing offer from Liberty. Voting rights are a sore subject, and I think that is reasonable. A big worry is how liquid these series C shares from Liberty will be. If an investor cannot vote, will they want to buy the C series, or simply own the A series of Liberty stock?
With the price of Liberty Media stock moving down, it is now more important than ever to get information out there with regard to this proposed transaction. There will of course be attorneys circling in the waters like sharks, and if Sirius XM investors are not better informed, some may gravitate to one or more of these firms that can gum up the works and cause further frustration and delay.
Liberty Media floated out this deal and got a lukewarm reception at best. It is time to get serious about the Sirius XM offer. For its part, Sirius XM is not pure in this either. While it should certainly take time for the independent members of the board to digest the offer, the offer letter is something that investors want to see. There are a few transcripts available from the conference calls, but these do not have very much for investors to sink their teeth into as yet.
Investors in Liberty and Sirius XM need to keep an open mind at the moment. Being close minded may leave you in a position of being a day late and a dollar short. With current dynamics, Liberty investors should be considering the possibility of the deal getting richer on the Sirius XM side of the equation. Will the 2 for 1 distribution of C series shares become something like 1.75 for 1? Will the shares become voting shares? Where will institutions be most likely to invest? These are the types of things Liberty investors, as well as Sirius XM investors, should be considering. There is indeed a deal in here somewhere. It is the mechanics of it that have investors sitting on the edge of their seats. If the goal is to get this done quickly, then investors from Liberty and Sirius XM need some transparency and certainty to work with.
At the moment, Sirius XM seems stuck below the $3.80's and just above the "offer" ratio of $3.69. Liberty is trending down. The longer this chasm between the two equities exists, the harder it may be to get a deal done quickly. No matter which equity you are invested in, you will want to pay close attention to both Liberty and Sirius XM while this issue persists.
Disclosure: I am long LMCA, 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.