In a pair of recent Seeking Alpha articles by Spencer Osborne, the author lays out the possible actions disclosed by Liberty Media (NASDAQ:LMCA) CEO Greg Maffei regarding the company's stake in SiriusXM (NASDAQ:SIRI). Spencer also points to other articles that lay out some of the benefits to Liberty if they use a Reverse Morris Trust (RMT) as the vehicle for an acquisition. While it is useful to go into detail on the benefits of a RMT, it diverts attention from the real issue of why Liberty would want to buy SiriusXM. Quite simply, a RMT should just be considered as a specific tax-advantaged form of a takeover.
Many Sirius shareholders, or at least many of those that comment on Seeking Alpha, view ANY takeover by Liberty as an evil plot by Maffei and Liberty chairman, John Malone, to steal their company. What most fail to recognize is that:
- Malone and Maffei have a primary obligation to Liberty shareholders to do what is best for the Liberty shareholders, not the Sirius shareholders.
- Liberty has representation on the Sirius Board of Directors. Although they are legally obligated to perform certain fiduciary duties for all Sirius shareholders, they are primarily there to protect the interests of Liberty, the largest shareholder of Sirius.
- Liberty already has the power to veto most strategic uses of the cash on the Sirius balance sheet as well as the future cash that will be generated by Sirius in the next several years. This includes acquisitions and share buybacks.
- Liberty cannot directly access or use the current or future cash generated by Sirius.
- The Liberty stock price does not come close to reflecting the value of the assets held by Liberty.
For those that say Mel Karmazin is doing a terrific job as CEO of Sirius and that Liberty should just leave the company alone, they should recognize Items 4 and 5 above as critical to understanding Liberty's motivations. Liberty currently has a Market Capitalization of approximately $6.6 billion at the close of the market on Friday, January 13th. Most of that market cap is attributable to Sirius. Liberty holds the equivalent of nearly 2.6 billion shares of Sirius common stock, which at Friday's closing price of $2.14 would equate to approximately $5.5 billion. From the most recent Liberty 10Q, Liberty has Available For Sale Securities (AFS) valued at $2.8 billion and also owns the Atlanta Braves which Forbes valued at $0.5 billion and TruePosition, Inc.
Start adding up the numbers and it is obvious that the Liberty market cap and share values don't come close to representing the assets underlying their ownership interests. It is what Liberty CFO Christopher Shean referred to as missing value at the Liberty Media Corporation Investor Day on November 17, 2011. At the time the missing amount was calculated at more than $14-$18 per Liberty share. Sirius was trading at $1.70 and the Sirius equity holding was valued at $4.4 billion. That missing value has most likely continued to widen as the value of Sirius shares have climbed more than 25%.
One way to return value to the Liberty shareholders would be to just distribute the Sirius shares to the LMCA shareholders and this is probably what many of the vocal Sirius shareowners on seeking Alpha would prefer. It removes Malone-Maffei-Liberty from the picture and allows Sirius to proceed as an independent company. At that point, Sirius could control its own destiny and proceed with share buybacks or acquisitions.
However, based on Maffei's comments at both the Liberty conference as well as presentations like the UBS 39th Annual Global Media and Communications Conference it is far more likely that Liberty wants direct access to the cash that Liberty sees Sirius generating over the next several years. That will require taking a majority position.
An investor should want the management of their company to maximize the value of their shares. Sirius shareholders want Mel Karmazin to maximize the value of Sirius. Maffei and Malone would like that as well, although their preference is probably to have that occur after Liberty gets to a majority stake in Sirius, but their primary objective is to return value to owners of Liberty Media. Whether they can engineer an RMT or not in the process is secondary.
Sirius investors would be wise to pay careful attention to what makes sense for Liberty Media.