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Summary

  • Recent daydreaming has caused some to wonder (again) about Sirius XM instituting a reverse split.
  • Sirius XM, in present form, will not be doing a reverse split.
  • Majority owner Liberty Media would see no benefit from a reverse split.
  • Investors would be better off focusing on reality and not what they would do if they ran the company.

A recent article about Sirius XM (NASDAQ:SIRI) here on Seeking Alpha explored why the author felt Sirius XM 'needs' a reverse split 'now.' I disagree, and to be completely honest I find the idea of a reverse split today not only improbable, but near impossible when one considers Sirius XM's present state.

The fact of the matter is that between the author and a few commenters, the idea of a reverse split is simply a daydream. It's an "if I ran Sirius XM instead of writing about it, then this is what I would do" sort of thing.

Why do I feel this way? Glad you asked!

There are certain critical issues here that need to be explored in order to understand the present state of Sirius XM.

First and foremost, Sirius XM is owned and controlled by majority holder Liberty Media (NASDAQ:LMCA). Understanding this is paramount to understanding what may or will be done with the company because 'everyone else' is the minority. All that matters is Liberty Media.

Second, Liberty Media's market cap is by gross majority made up of the value of its stake in Sirius XM. Because of this, Liberty Media guides Sirius XM, and Sirius XM guides Liberty Media.

You can dislike these facts, but they are not changing anytime soon. If you are invested in the company, you should be completely comfortable with this arrangement which has been in place since Sirius XM traded for about 10 cents back in 2009.

So why do I say Sirius XM will not be doing a reverse split? How can I be so confident? Because it doesn't benefit Liberty Media to do a reverse split. It's that simple. Likewise, if one subscribes to the notion that a reverse split would drive out what is insinuated as 'dumb' retail and bring in what is insinuated as 'smart' institutions, then one also subscribes to the notion that the share price would increase above the increase due to the reverse split.

Investors who have been paying attention should understand that a higher share price does not benefit Liberty Media during Sirius XM's stated buyback program. If I have $2 billion, I am able to buy back 500 million shares at $4, or 667 million shares at $3, or 400 million shares at $5.

I will say it again, what is best for Liberty Media is what is going to happen, and since what is best for Sirius XM is lower pricing during the buyback period, moves will not be taken to toy with the share price to the upside. If you are buying back shares you want liquidity. You want retail in there. You want traders. You certainly do not want to drive liquidity down and pull in what would typically be stronger handed institutions, right? What would be the point? So the company could pay more for the shares being repurchased?

Recent comments that the buyback has failed, has not been successful, or has been disappointing, completely miss the point of a large scale buyback program. It's the company investing in itself. It's a $4 billion authorization to decrease the float and, hopefully, buy as many shares as possible. It's not a short-term pump and dump scheme by the company so people can flip in and out of the stock, even if some would like it to be.

It's obvious that the buyback is far more effective at lower pricing than higher pricing. The time for a reverse split may come someday, but it is likely to be done in conjunction with Liberty Media spinning the company out and the reverse split itself will be a non-event. I don't expect that to happen this year.

Until then? A reverse split is the hopes and dreams of a few. While such things may be fun to talk about, they only serve to distract from probability with what is barely a remote possibility.

Source: Sirius XM: Reverse Split Request Denied

Additional disclosure: I am long SIRI January 2015 call options at $2.50 for the majority of my position, as well as smaller positions in $3 and $3.50 calls.