Ever since Liberty Media (NASDAQ:LMCA) made an unsolicited offer to Sirius XM (NASDAQ:SIRI) to exchange .076 shares of a new non-voting series of Liberty shares for each of the Sirius XM shares it did not already own, investors have been waiting for a response from the Sirius XM Board.
To briefly recap the situation, Liberty took majority control of Sirius XM early last year. At that time Liberty replaced certain directors and currently has a majority of the seats on the Board. When it submitted its merger proposal on January 3rd, it requested that the Board:
...appoint a special committee of independent directors to consider our proposal and make a recommendation to the Company's Board of Directors. We will not move forward with the Proposed Transaction unless it is approved by such a special committee.
The proposal further noted that:
...we encourage the special committee to retain its own legal and financial advisors to assist in its review of our proposal. We and our advisors look forward to working with the special committee and its advisors to expeditiously negotiate and consummate a mutually acceptable transaction. We are available at your convenience to discuss any aspects of our proposal and this important transaction.
Clearly, Sirius XM was in no hurry to act "expeditiously." It took three weeks to form the special committee and to announce that it:
...had retained Evercore Group L.L.C. to act as its financial advisor and Weil, Gotshal & Manges LLP to act as its legal counsel...
At the same time, Charter Communications (NASDAQ:CHTR), another company in which Liberty owned a significant stake, was bidding to acquire Time Warner Cable (NYSE:TWC) and there was a belief that the Sirius XM merger would provide Liberty with direct access to the free cash flow and borrowing capacity at Sirius XM. However, in the interim, Charter lost out to a competing offer from Comcast (NASDAQ:CMCSA) (CMCSK), and there were questions about whether or not there was any urgency to complete the Sirius XM merger.
Investors are still waiting to learn about the findings of the special committee, how far it has progressed in an evaluation or if it has even begun negotiations. This delay was why I had been looking forward to the earnings conference calls by Sirius XM and Liberty, as well as a presentation by Greg Maffei, the Liberty CEO and Sirius XM chairman, at the Morgan Stanley Technology, Media & Telecom Conference on March 3rd, hoping to hear something new on the status of the review. Anyone expecting to find out anything substantial was disappointed.
On the Sirius XM earnings conference call on February 4th, CEO Jim Meyer gave this brief update:
Let me now give you a quick update on Liberty Media. In response to Liberty's offer to swap its equity for the remaining public shares of Sirius XM, a special committee of our board of directors was established. This special committee has now hired its own advisors to evaluate Liberty's proposal and negotiate on behalf of the non-Liberty shareholders. If the special committee can reach an agreement with Liberty on a favorable transaction, any deal would then have to be approved by the majority of the non-Liberty shareholders. That's the process, and it's well underway.
During this process, on the advice of legal counsel, capital returns are on hold.
So, one month later and there was no real news, and surprisingly, no follow up questions on the status or timing of the process by the analysts on that call. When Liberty released earnings on February 28th, the press releases quoted Maffei:
In January, we announced a proposal to acquire the rest of the Sirius XM equity not owned by Liberty. We believe this combination will simplify the capital structure, further align management and provide ultimate strategic and financial flexibility. We are responding to requests for information from the representatives of Sirius XM's special committee.
During the conference call later that day, Maffei reiterated that "We are working with the Sirius XM special committee and their advisers as they conduct their due diligence on our offer." The analysts were interested in the status of the proposal, the urgency of the deal, the nature of the requests and the timing of a response. That urgency was in doubt due to the collapse of the Charter hostile takeover attempt.
During the Q&A, in response to a question of whether or not Liberty still felt the need to complete the merger given the failed Charter bid, Maffei noted:
As I said, we are in the process of really doing due diligence with the special committee's representatives, and we'll see where that goes. All along, I would note our view is, is that's the right deal. It's a good deal, but it's also a deal that doesn't have to happen.
This was followed by a question about what would be done with the leverage at Sirius XM if the merger were completed, and as expected, Maffei left the answer rather broad:
...the creation of the C is not only to have a big liquid trading currency to potentially complete a transaction with Sirius XM, but down the road, it gives more flexibility for Sirius XM to do certain kinds of acquisitions. It may also be the case that we want to use Sirius XM's cash flow for share repurchase or for strategic acquisitions. ...you can imagine other kinds of acquisitions, for stock or cash, that would strengthen the Sirius XM business and give it even greater legs going forward.
When asked about the timing of the review and completion of a potential merger, Maffei noted that Liberty had met to discuss information flows, but that the completion was not imminent:
We've not yet met to discuss an effective barter and negotiate. Sometimes that's been known to happen with special committees, and I suspect it may happen in this case as well. Once that process is done and there's agreement, if we're able to reach agreement, I suspect it's probably 90 to 120 days from that point. But it's too early really to say how long any negotiation process or information process on due diligence is going to take.
The most discouraging part of that remark may have been the phrase that it's "too early" to tell how long the information process would take. It's not clear why there isn't more progress on the evaluation and negotiation. One excuse might be that the valuation of Liberty's holdings can be difficult. Maffei had this to say about the value, vs. the share price of Liberty:
...if you look at the net asset value of the underlying components of Liberty, putting aside the current share price, that suggests we're trading at some discount to underlying components and therefore, value is being transferred already to the Sirius XM shareholders other than Liberty. But we also noted, I think early on, that these processes usually involve some negotiation, and we would expect that there will be an ask from the special committee. That not would be - that would not be unusual to see that. And whether we're willing to meet that ask, we'll see. And whether that ask is in the form of cash or stock, we'll see that as well. ...it's not a deal that has to happen. It's certainly not a deal we have to chase. It's certainly not a deal that needs to get done in the sense that we will remain the control shareholder of Sirius XM regardless of whether it gets done or not. So there certainly are limits to what would be appealing.
The portion of the Liberty valuation that is fairly easy to assign dollars to are its publicly traded stock holdings in Sirius XM, Charter, Barnes & Noble (NYSE:BKS) and Live Nation (NYSE:LYV). These are worth nearly $16.3 billion as of this writing. Even its ownership of the Atlanta Braves can be assessed reasonably well by looking at the values of other baseball franchises, including one released by Bloomberg last October. That one listed the Braves as worth $760 million. We can also look at Liberty's 10K to see its year-end debt, cash and other "available for sale" securities. These had a net value of $0.3 billion. The sub-total of these items is nearly $17.5 billion, well above the company's market cap of $15.05 billion. These figures ignore the rest of Liberty's assets, including 100% of TruePosition and interests in a variety of other businesses and real estate holdings.
For those interested, the Sirius XM portion at $3.47 is $11.3 billion of the total of more than $17.5 billion and why Maffei stated that there certainly are limits to what would be appealing. In my view, it is this discount to net asset value that is the reason that there is not a lot of room to increase the ratio or sweeten the offer of 0.076 Liberty Series C shares for each Sirius XM share. It should also be noted that since Liberty Chairman John Malone essentially controls almost 47% of the votes at Liberty, it will ultimately be his decision on how much to pay.
Is The Growth Slowing?
One analyst was concerned about the low guidance of 1.25 million net adds for 2014, and wondered if it reduced the "appetite" of Liberty to complete the transaction. Maffei's response:
I think Jim Meyer has been articulate about both the challenge of just the law of large numbers, of growing the business and new
subs, but also, some of the technical factors related to new car sales and how our existing base is upgrading to new cars and what that is doing to the sub count - or excuse me, the new sub count. I think we remain very interested in Sirius XM, believers in Sirius XM. We're the majority shareholder of Sirius XM. We're certainly not walking from it. And as I said, we knew, when we made our offer, that, that announcement was coming.
When the law of large numbers is used in financial discussions, it is usually referring to the fact that as companies grow, the rate of growth slows. In the case of Sirius XM, it is not only the rate of growth that is forecast to slow down, but numerical growth in the number of additional subscribers is expected to come in below the prior year for the first time since 2009.
Morgan Stanley Technology, Media & Telecom Conference
Maffei next spoke publicly about the status of the merger proposal on March 4th. There were similar comments about the need to merge:
It's not a case where we're going to chase, through the exchange ratio, something that's unattractive. We already trade at a little discount, less than we have historically, but still a discount to NAV. So inherently, those shareholders are already receiving a premium though our stock. So the combination makes us, we'll be judicious.
Regarding the timing of the deal and the status of negotiations:
As we are working with their advisors, no. We really haven't gotten any response yet from them, and I don't mean to throw them under the bus, but they're gathering their information, we're answering questions, and we'll see how it goes.
Maffei was once again asked about the growth of the business, whether there was "something happening in the business or is it just law of large numbers?" He was also asked whether he remained as bullish as he had been in the past. After replying that there was a piece that was due to large numbers and slowing auto sales growth, he noted that he also saw significant opportunity. Much of that optimism was tied to the number of vehicles on the road compared to the 26 million Sirius XM subscribers:
We've got lots of room to grow in that premium category and do very well and there's probably some elasticity, there's probably incremental services, there's incremental value we can offer them over time that I feel very good about.
There are some investors that believe the merger is critical to Liberty and its need to access capital, so it was not surprising that questions about Liberty's ability to raise capital if the merger did not happen.
Well, I think you saw some of the things we did to raise capital in the latter half of 2013. We did a convert with a bond warrant that effectively made it up about 75% up off of about 148 spot something like that, 250 kind of conversion. Long-term, low-cost capital because the bond warrant's deductible. It actually has a net negative cost in the interim. That was an example of an attractive way to raise money. There are other ways we could raise money at a debt level or equity-linked debt at Liberty Media parent or potentially at any of its subs and have them drive capital. Frankly, you've seen us get capital out of Sirius through their share repurchase of our stock and them. That's another source. And then depending on the project, we've had, for example, when it was potentially discussed that we'd be out doing cable, we had many people approach us about co-investing alongside that.
And one other one, ...some other pool of capital that we could access that would be like that and maybe on a deal-by-deal basis, not a blind pool, but some way that we would be able to create a private pool alongside our public equities. Those are some examples.
Maffei is in an awkward position. As CEO of Liberty, he has a responsibility to portray the assets of Liberty as valuable as possible. As the Chairman of Sirius XM, he has a responsibility to get the best deal possible for Sirius XM. It is why Liberty wanted the formation of the special committee, why it was to be comprised of the independent directors, why they retained their own legal and financial advisors and why this will ultimately be put to a vote of the non-Liberty shareholders of Sirius XM. Ultimately, however, he is more interested in getting the deal done at the right price for Liberty.
A cynic might think the foot dragging is due to the advisors trying to maximize billable hours. Much larger deals have been known to happen - or get rejected - far more quickly. It is hard to fathom why the parties have not yet reached a negotiation stage despite any difficulty in valuing some of the Liberty assets. This is especially true since there really isn't a lot of room where the deal makes sense for both parties.
Later this evening, Maffei will once again speak to analysts and maybe a bit more information will be revealed. Investors should take the opportunity to listen.
Disclosure: I am long SIRI, CMCSA. 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 actively trade SIRI. In addition to my long positions in SIRI, I have January 2015 $4 covered calls written against several of these positions. I may initiate new covered call positions or close out or open new positions in SIRI at any time. I have no plans to trade any of the other stocks discussed in this article within the next 72 hours