Sirius XM: Why Liberty Will Not Pursue A Deal

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 |  About: Sirius XM Holdings Inc. (SIRI), LMCA
by: Wall Street Playbook

Summary

Liberty did not invest in Sirius to capitalize on the stock price.

Sirius, to them, is a special purpose entity that generates cash flow, which is to be used to finance and/or leverage Liberty's conglomerate goals.

Liberty has been able to get its stake up to 53% while using as little cash as possible.

Shares of Sirius XM (NASDAQ:SIRI) rose slightly Wednesday to $3.21 after Liberty Media (NASDAQ:LMCA) CEO Greg Maffei said it "makes sense" to absorb the satellite radio company but added Liberty would not pursue a deal. The stock ended the day flat at $3.17.

Since the stock reached a near-term low of $2.98 several weeks ago, shares are up more than 6%. But on the year-to-date, Sirius has lost more than 9% of its value. Note, I have a $3.50 price target on Sirius shares. But I'm not opposed to changing that view at any moment. As information changes, it is prudent for one to change their mind.

But as Maffei talked about Sirius' future, I was reminded of how Sirius' fate is out of its own hands. Appearing on CNBC, Maffei said "consolidation in the industry is not finished yet." Do you think he knows something? It's also possible that Maffei believes that Sirius is too expensive to buy at current levels. Its P/E of 56 certainly supports this notion, given that Sirius is not growing as strongly as the P/E presumes.

By "consolidation," I suspect he may be referring to (among other events) Apple's (NASDAQ:AAPL) rumored $3.2 billion deal for Beats Electronics. Beats, which also sells popular headphones, will give Apple the streaming service that it needs to compete in an internet-dominated world.

Perhaps Maffei sees Apple's willingness to shell out 60% premium for Beats, which according to Forbes is worth $2 billion, as a sign that the streaming audio market is beginning to bloom. There is now word that Google (NASDAQ:GOOG) (NASDAQ:GOOGL) might be looking at Pandora (NYSE:P). Beats' valuation has raised Pandora's profile. Maybe Maffei sees Pandora as the next domino to fall.

It's also likely that Maffei caught wind of Spotify's exceptional growth. If, say, Google or Microsoft (NASDAQ:MSFT) picks off Spotify or Pandora for a 60% premium, what would that say about Sirius' value, given that Sirius is approaching 26 million subscribers, of which, 21 million are paying for the service?

Maybe Liberty is waiting out for its own offer. Certainly Sirius should command something close. A 60% premium places Sirius' value at around $5 per share. Would investors vote yes? Or maybe Liberty will propose another bid for Sirius when Sirius stock falls another 10%, placing it at $2.85. (I'll explain why later)

Recall, back in January, John Malone, Liberty's chairman put up a $3.68 per share bid to buy the remaining portion of Sirius that Liberty does not already own. Malone offered 0.076 shares of Liberty for each outstanding share of Sirius that Liberty didn't already own. With a 53% stake, Liberty already owns a majority of Sirius.

Since that offer, Sirius' value has plummeted more than 23% (counting the $2.98 low). Essentially, investors who lashed out against the offer saved Liberty from making a mistake. Sirius has now re-instituted the share buyback program and self-serving articles are telling you that the buyback "requires a long-term horizon." But how much longer should investors wait? The article never explained this.

Now this circles back to the effectiveness of the share repurchase program, which, along with a special dividend, was first announced in December 2012. On the day of the announcement, Sirius stock traded as high as $2.85. Today, with the buyback more than 50% completed, the stock is up only 11%.

And let's assume the remaining authorization is completed by the middle of next year, which is possible, with over 6 billion shares outstanding, it still wouldn't get the stock to $4. Do you think Maffei knows this? Of course he does. But investors are making the mistake in thinking that their interests align with Liberty's. Liberty has profited from the buyback. Investors.... not so much.

Liberty did not invest in Sirius to capitalize on the stock price. Sirius, to them, is a special purpose entity that generates cash flow, which is to be used to finance and/or leverage Liberty's conglomerate goals. Liberty has been able to get its stake up to 53% while using as little cash as possible.

And should the share price fall back to the pre-buyback level of $2.85 (10% decline), not only would Liberty have profited from the share buyback, it is at that point Liberty will make another bid to steal this company away from shareholders. And it's brilliant.

I'm often asked, "why am I bearish Sirius?" Is it because "I think John Malone is an idiot." My response is always the same; I'm bearish Sirius because Malone is brilliant.

Disclosure: I am long AAPL.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.