Why Would Liberty Increase Its Sirius XM Stake Now?

by: Satwaves

By Brandon Matthews

Sirius XM Radio (Nasdaq: SIRI) investors continue to wait on pins and needles for a filing detailing a possible recent purchase by Liberty Media (Nasdaq: LMDIA). Despite recent news that the Justice Department has green-lighted a purchase by Liberty that would increase its voting rights, there are still some that question Liberty’s motives in making such a purchase. At present, Liberty is free to purchase over 600 million shares of Sirius XM common stock. Following the Justice Department approval, SIRI shares traded on the highest volume in the company’s history, topping the 600 million share mark last Wednesday.

There can be little doubt that Liberty believes that significant upside potential exists to Sirius shares. At any recent public conference, Liberty makes no qualms regarding their positive stance on Sirius XM. Its preferred stake in Sirius XM is nonetheless an illiquid investment, and the company has stated that it will never seek to monetize those shares through a conversion to common.

Simply put, if Liberty believes in the upside potential of Sirius XM, it will need to make separate purchases of SIRI common shares in order to profit from their assumed rise. This could very well be one answer. If in fact Liberty has made a substantial purchase of SIRI, that would be considered a very large insider purchase that the Street would no doubt take notice of.

Another possible answer deals with Liberty’s future intent. Although Liberty must wait until 2011 to increase its stake above 49.9%, a tender offer could be made at any time. Liberty has stated that it might be interested in acquiring the outstanding shares of Sirius XM in the future. If in fact this is true, and Liberty believes that Sirius XM shares will appreciate significantly, then it would be best served by buying all it could at the lowest price possible.

By purchasing Sirius XM shares at a suppressed sub one dollar share price, Liberty could save over $600 million based on a $2.00 tender offer. At $3.00, it would save over $1.2 billion. So why wait until now, rather than increase its stake when Sirius XM was trading even lower? Well, it may be that the cash just was not there. At the time it took its initial stake, Sirius XM had yet to prove itself, or simple economic concerns may have stood in the way.

Since that time Liberty has made some moves, not to mention the fact that Sirius repaid Liberty in full which returned to Liberty enough money to more than pay for an increase in its equity stake. In an ironic twist, it just may have been Sirius itself which provided the means.

Disclosure: Long SIRI