There is a lot of discussion from investors relating to the proposed Liberty Media (LMCA) transaction that would essentially roll Sirius XM (SIRI) into Liberty by trading out Sirius XM stock for a C series share of Liberty. As has been discussed, the transaction is essentially a ratio. What many seem to get confused about is the fact that a Sirius XM investor will still have stock moving forward. Let's look at the numbers.
Under the proposed transaction here is what we are dealing with:
- There are currently about 104,364,879 shares of LMCA
- There are currently about 9,876,578 shares of LMCB
- LMCA holders will get 208,729,758 shares of C series
- LMCB holders will get 19,753,156 shares of C series
- Combined, Liberty entities will get 228,482,914 shares of the C series
- The minority group of Sirius XM shareholders hold about 2,886,505,148 shares of Sirius XM stock.
- The minority group would get about 219,374,391 shares of the C Series.
- The C series would have a total of about 447,857,305 shares.
- It will take about 1.4 billion shares of the minority to approve of the transaction.
- Institutions (other than Liberty) hold about 1.6 billion shares. The issue, in theory, could pass on institutions alone.
- Retail investors hold about 1.2 billion shares. The issue cannot pass on retail investors alone.
What is presented above is a lot of information. What we need to consider next is why these C shares might carry liquidity and value as a going concern moving forward.
I have been asked many times why an investor would buy a C share with no vote over an A share that has voting rights. There is no simple answer to that question, but let's consider voting in general.
Liberty Media currently has 104 million shares. The B series has about 9.9 million shares and are super-voting shares. The B series gives 10 votes per share and are held mostly by John Malone himself. Essentially, Malone controls about 49% of the vote on the A series shares already! Thus, the concept of non-voting shares might be a moot debate anyway. The C series shares will be non-voting, but in the end, shareholders of Sirius XM already (outside this matter) do not have the voting power anyway.
Essentially, the proposed deal is a pretty clean deal, albeit, Sirius XM investors would like to see a bit of a premium. In concept, the pure play of a satellite radio investment would be gone, but in the end, Sirius XM, as a going concern, would represent between 70% and 80% of the Liberty Media market cap. The thought that Liberty would be harmful to a company that makes up 80% of its value is counter-intuitive to what Liberty or John Malone have done in the past.
Indeed, Liberty has expressed an interest in accessing the capital and leverage Sirius XM can provide. That does not mean that he will run away with the dollars. While the capital returns may be utilized for things other than share buybacks for a period of time, the theory is that using the capital will increase value further. Liberty has a history of returning capital to shareholders. Why would that dynamic change?
What we all need to consider is that the economy is beginning to get rolling again. If there are attractive deals, they will take away from the ability of any company to buy back shares. Companies typically do what they see as most accretive. Sometimes that is acquisitions, and sometimes it is buybacks.
The biggest thing to understand is that you will still have an investment. In fact, should the deal go through, you will have an investment in a company that has a massive part of its value in Sirius XM. Investors should also understand that because you will still have stock, there is a finite amount of "premium" that makes sense in this transaction. The easiest way that I can think of to explain that is this. If you have plane tickets for you and your spouse on a flight, but you are not sitting next to each other, you may offer up buying someone a drink to switch seats with you. If the trade is comparable (aisle seat for aisle seat), that person may take you up on the deal. If the seats are not comparable (aisle seat and middle seat), that person may say no. In that case you would perhaps offer up a drink and $20. You are not going to offer up to buy the person another flight because that makes no sense. For Liberty, this transaction makes sense within a certain window. If it goes beyond that, there will no longer be a deal.
While I am sure certain shareholders will love it if the deal fell through, my suggestion would be to wait and see what is actually on the table. We do not know that yet. Speculation is that if the Charter and Time Warner deal goes through, that there will be at least $750 million in synergies. Synergies allow for profits. Profits are what return capital to shareholders. With no deal, you have little chance to participate in that unless you buy into Liberty, Charter, or Time Warner. If a deal does go through, you have a way to reap the rewards simply by holding a stock you already have. In simple terms, expecting a premium on a theoretical future vale of Sirius XM is not really part of the discussion. That value can still present itself, and will not necessarily evaporate.
Further, there is now real potential that Sirius XM will be more fairly valued. Over the past three years, savvy investors have realized that they can invest in Sirius XM at a relative discount by buying LMCA stock instead of Sirius XM. Many have made a fortune with that play. Before making a rash decision, consider all of the variables. I have stated that I feel Liberty will need to sweeten the deal a bit. A 7.5% to 10% premium is the maximum that I see being on the table.
Lastly, the independent board members are likely in the process of hiring the appropriate advisors now. At this point, this entire negotiation is between those three board members and Liberty Media. Those board members carry a fiduciary responsibility to the minority holders of Sirius XM. With regard to this transaction, Liberty carries a fiduciary obligation to its shareholders. Rest assured that both parties are proceeding with a full understanding of that and are acting appropriately to their respective duties. Personally, I keep my emotion out of this. I simply offer an informed opinion on where I see things going and what the numbers are. Some investors will appreciate that, others will not. I would love to get a "big premium", but simply do not see it in the cards under the current circumstances.