Sirius XM Investors Eyeing Move By Liberty May Be Blindsided

Feb.27.12 | About: Sirius XM (SIRI)

Sirius XM (NASDAQ:SIRI) investors have been waiting for March 6, 2012 to arrive for almost three years. That date represents the point in time when Liberty Media (NASDAQ:LMCA) is free of all restrictions regarding their stake in Sirius XM. Essentially that is the time when Liberty would be allowed to make some sort of move without a lengthy process.

Many analysts and investors alike feel that Liberty is bound to do something aside from sitting still with Sirius XM. The Liberty stake in the satellite radio provider, about 40% in the form of voting preferred shares, represents the largest chunk of the value in Liberty holdings. Common sense tells us that Liberty will not likely simply sit on their shares.

So with all of these dates known, and analysts all covering virtually any angle of the Liberty issue how is it that Sirius XM investors might get blindsided?

The answer came in an analyst report issued by James Ratcliffe of Barclay's. This particular report was not popular with many Sirius XM investors because the analyst initiated coverage with an Underweight rating and a price target of $2.00. However, contained in that report was a nugget of information that most overlooked, and this is a sterling example of why understanding the bull as well as the bear argument is imperative if you want to have any success trading equities.

In his initiation of coverage, Ratcliffe mentioned something that many Sirius XM investors and even Liberty Media investors might not have considered:

We believe Liberty has ample liquidity for this move and could increase its stake through forward purchase commitments, which wouldn't require an interim announcement that the stake has increased. While we don't expect a repeat of the Liberty/DirecTV transaction, in which Liberty holders got a 6-7% premium, we also don't expect a material discount.

It appears that despite an opening rating of underweight, and a price target of $2.00 that Ratcliffe may be the smartest guy in the room no matter where the price of Sirius XM goes.

Think about this for a moment. Liberty media can increase their stake with a pre-arranged buy and would not have to notify the SEC about that arrangement until it happens. Think about it. Liberty works out a deal with a substantial shareholder to buy the shares required to take them over 50% at a pre-arranged price and on a pre-arranged date. This can all happen without investors or even Sirius XM being advised.

This means that Liberty can make a move to take their stake over 50% with the equity trading as it normally would. Some investors have been waiting for the day that an announcement comes in hopes that the announcement that Liberty was increasing their stake would send the stock surging. What we have here is a nugget of information that essentially would negate any movement in price based on Liberty increasing their stake. That being said, once a hypothetical pre-arranged deal was consummated, the news would be out, but Liberty will have in effect already made their stake bigger.

Certainly some will view this article as Spencer raining on a parade, but it is exactly the opposite. It is Spencer outlining a possibility that up until now many have not considered. This is a piece of news that could have implications for anyone invested in this stock, be they long, short, are active traders. I am not saying that this will happen, or even that it will happen around the March 6, 2012 date. I am simply outlining the possibility.

The next step is to try to assess the chances of something like this transpiring. The first thing one needs to do is step away from the Sirius XM side of this equation and focus on the Liberty side.

If you are Liberty your goal might be to obtain a large enough stake in Sirius XM to allow you the flexibility to conduct a Reverse Morris Trust and monetize your position in a tax friendly manner. Liberty will want to obtain that stake as cheaply as possible. The best case for Liberty is for Sirius XM to conduct share buybacks, which Liberty would not participate in. By not participating, the percentage of the Liberty stake would increase without the company having to make any type of move. I covered this very subject nine months ago in an article titled, "Understanding Sirius XM's Potential Share Buyback And Liberty media Stake". In that article I pointed out that the Liberty stake would increase if Sirius XM were to buy back common shares without buying back any preferred. I was highly criticized at the time for outlining this, but over time even my harshest critics have agreed, and come to the conclusion that indeed if a buyback happens and Liberty does not participate that their stake would increase.

Absent a share buyback, the most cost effective way for Liberty to get over 50% for the cheapest possible price is to pre-arrange a share buy. In effect Liberty would be able to obtain a substantial amount of shares at a set price. Such an arrangement would facilitate the hypothetical goal of getting over the 50% threshold.

The next question would be why anyone would make such a deal. The answer to that is actually quite simple. Let's assume that a company took a substantial position in Sirius XM at $2.00 per share and was looking for a guaranteed 10% gain. A pre-arranged sale at a price of $2.20 would give the seller the gain they want and give Liberty the shares needed. The seller is happy with their 10%, and Liberty is happy because they do not need to conduct open market purchases of the stock in order to garner the shares needed.

While the idea of this seems so simple, and makes perfect sense, it is sometimes the simple things that are right in front of our eyes that we ignore. Should this happen, it wouldn't be the first time. The news here is that it could happen without SEC notification, the event that many SIRI investors have been looking for in order to see a surge in stock. A pre-arranged sale is something I have discussed on radio shows and written about. The lack of SEC notification is simply something many, myself included, have overlooked.

In the end, March 6, 2012 may come and go without a peep regarding the Liberty stake, but in this case silence does not mean nothing is happening. In fact, investors should consider that there are many negotiations happening regarding the Liberty stake. Liberty and Sirius XM would be remiss if they were not active in discussing the possibilities. The issue is that Sirius XM may well not be privy to the plans of Liberty.

The moral of this story is that we as investors may indeed be blindsided at some point in the not to distant future. I think all will turn out fine, but banking on a price surge based on Liberty increasing their stake may be something you want to reconsider.

Disclosure: I am long SIRI.