- Liberty Media's proposed moves should help close some of the NAV gap.
- While the near-term impact on Sirius may be negative, it provides an attractive opportunity to gain exposure.
- The proposed actions also provide investors a cleaner way to invest in Liberty’s cable interests.
Liberty Media Group (NASDAQ:LMCA), billionaire John Malone's holding company, recently announced a restructuring of its common stock to create two new tracking stock groups, the Liberty Media Group and the Liberty Broadband Group. However, the news that has pleased investors more is that the company has abandoned its January 3rd proposal to acquire the remaining 47% of Sirius XM (NASDAQ:SIRI).
A Little Background
Liberty Media has always traded at a discount to NAV. However, last year the market sharply narrowed the discount on Liberty from over 10% to near parity, as the expectations of Charter Communications (NASDAQ:CHTR) taking a leading role in consolidating the U.S. cable market increased. The narrowing of the NAV discount on Liberty proved to be a blessing for Malone because Charter would have had to issue equity to help consolidate the U.S. cable market. And, to avoid violating the Investment Act of 1940, Liberty Media would have to come up with billions in cash to keep Liberty's stake in Charter at 25%.
Since Liberty did not have the cash, Malone took advantage of Liberty Media's stock to try and acquire the 47% of SIRI it did not own. This plan would have allowed Liberty to use SIRI's cash flow and borrowing capacity to help Charter with cable consolidation, while maintaining Liberty's stake in Charter at 25%. However, 2014 changed things for Liberty. Firstly, and more importantly, it seems unlikely that Charter will take a leading role consolidating the U.S. cable market. And secondly, the market has begun to assign a larger discount to Liberty. This has also changed the dynamics of the SIRI tender offer. First of all, the need to consolidate Sirius is less pressing, and secondly, due to widening of Liberty's NAV discount, the cost of consolidating SIRI has also increased. All these events have led Malone to decide to split his media holding company into two tracking stocks later this year.
A Cleaner Way To Invest In Liberty's Cable Interests
As a result of the restructuring for the first time in over a decade, there will be a public equity that would allow investors to invest directly in Liberty Media's U.S. cable interests. In the new structure, the Liberty Broadband Group will track the company's interest in Charter Communications, its stake in Time Warner Cable (NYSE:TWC), its privately-held subsidiary TruePosition and other liabilities; while the Liberty Media Group will track all other businesses, assets and liabilities of LMCA, other than those mentioned above, including Liberty's 53% interest in SIRI.
There are a number of implications of LMCA's proposal to create two new trackers. First of all, Liberty continues to see opportunities in cable and it is quite possible that this is a move designed to help Liberty participate in cable consolidation. Liberty is providing investors a cleaner way to invest in the company's cable interests by creating a tracking stock that is cable asset-specific. Moreover, the company also wants to have some dry powder on hand, raised via a rights offering and the planned intercompany loan. A pure cable currency combined with capital raise at the new broadband tracker should make it easier for Liberty to participate in cable consolidation.
SIRI Could Accelerate Buybacks
This new move could also lead to a potential Sirius XM Reverse Morris Trust (RMT). LMCA has indicated in the past that it would consider undertaking the RMT only after recovering approx. $1.7 billion in SIRI to take its equity interest above 50%. This is likely to be achieved through Liberty's participation in SIRI's buyback program. Sirius had previously agreed to buy-back the remaining $340 million of its stock from LMCA in Q1 and Q2. The buybacks were put on hold due to LMCA's bid earlier this year for the remainder of SIRI. Now, with the bid being withdrawn, the buybacks will be resumed.
Liberty's announcement also takes the company's proposed Sirius buy-in off the table and is likely to pressure SIRI's shares in the near term. LMCA viewed the SIRI buy-in as primarily a financial transaction and likely decided that the rights offering was a lower-cost way to raise capital when faced with raising the premium paid to minority SIRI holders. The latest developments could also result in SIRI accelerating its buyback program and any-sell off of SIRI is likely to be a good entry point in the stock. While SIRI's subscriber growth story could be slowing down, the company's strong expected free cash flow growth deserves a premium vs. capital return stories in media distribution.
LMCA continues to see opportunities in cable and by creating a cable asset-specific tracking stock; the company is providing investors a cleaner way to invest in its cable interests. As mentioned earlier, by having a pure cable currency combined with the capital raise at the new Broadband tracker, it should be easier for Liberty to participate in cable consolidation. The new Liberty Broadband tracking stock and the rights offering should also help the company narrow the NAV discount. A sell-off was seen in the SIRI's stock following the announcement of restructuring and is likely to be a good entry point in the stock.
Overall, these proposed moves should help close some of the NAV gap in LMCA that has arisen since LMCA's bid for the remainder of SIRI earlier this year. As far as Sirius XM is concerned, while the near-term impact on the stock may be negative, it could prove an attractive opportunity to gain exposure. Moreover, the likely near-term pressure on SIRI should be offset by the resumption of SIRI's buyback program and return of its core investment thesis.