Liberty Media (LMCA, LMCB, LMCK) is on the cusp of creating several tracking stocks, one of which would track its stake in Sirius XM (NASDAQ:SIRI). Liberty now controls 62% of the satellite radio provider and sees its ownership level increase each time Sirius XM buys back shares on the open market.
Liberty Media CEO Greg Maffei has made public statements more than once that the company would like to gain 100% control. The caveat is that Maffei only wants to do such a deal at the right price. That begs the question of what it would take for Liberty Media to gain control of Sirius XM.
The first simple reality is that the company would need to make an offer that passes muster with a majority of the minority. In other words, a majority of the holders with the other 38% in Sirius XM would need to approve.
If we look at the institutional holders of Sirius XM, we note that, according to Nasdaq, 23.3% is in the hands of big players. Institutional ownership at just 23% may seem low, but the number excludes Liberty Media's stake. Let's look at some numbers:
- There are 5,095,994,772 shares of Sirius XM stock.
- Liberty Media controls 62% or about 3,160,000,000 shares.
- This leaves about 1,993,994,772 shares on the market.
- Institutions control 1,187,499,360 shares.
- This means that 748,495,412 shares are controlled by entities or people outside the institutional reporting.
- If you combine the Liberty stake with the institutional stake, the ownership level is at about 83%.
- The majority of the minority needs just 996,997,181 shares to meet the criteria.
That pathway of a buyout decision needs just under one billion shares to see the action through. Liberty Media made an attempt to take control of Sirius XM two years ago, when it held a 56% stake in the company. That deal was met with some resistance, had a very narrow window in which it worked, and was ultimately pulled off of the table by Liberty. In hindsight, the resistance to that original deal was likely not wise. Liberty and Sirius XM have traded in tandem since, and in addition, Liberty Media shareholders have had the benefit of some spin-offs.
Liberty Media could, in concept, align some of Sirius XM's bigger institutional investors this time around. Liberty has moved up eight points in ownership without having to spend a dime since 2014. This is happening as a function of Sirius XM buying back shares on the open market and lessening the outstanding share count.
The idea of Liberty taking control of Sirius XM is seeing renewed interest not only because of the comments of CEO Greg Maffei, but also because Liberty Media is splitting up into several tracking stocks. This move will separate Liberty's Sirius XM stake from things like The Atlanta Braves and Live Nation Entertainment (NYSE:LYV). The idea behind the tracking stocks for Liberty is to unlock some hidden value. For example, an investor can buy Liberty Media for a satellite radio play and get Sirius XM shares at a discount. This dynamic alone makes it hard for Sirius XM to move unencumbered. The fact that a Sirius XM play can be made at a discount is well known and an oft-discussed subject by analysts.
Sirius XM investors should not view the idea of a buyout in a negative light. The equity has been stable, but has not delivered the type of value one might think. If control of the company is in one place, the equity might finally be able to move like a company that is buying back shares at a steady clip like Sirius XM is doing.
I would anticipate a potential buyout deal may carry an offer of a small premium once again. This time, however, an all-stock transaction would involve a much more "pure" Liberty entity represented by what will be a newly created Liberty/Sirius XM tracking stock. There comes a time to simply do what makes sense.
I have yet to see a reasonable argument as to why getting this satellite radio business under one roof is a bad thing. Sirius XM is a valuable commodity that has essentially been off of the market in a time when mergers, acquisitions and value creation plays have been transpiring. We have even seen DirectTV merge with AT&T (NYSE:T). As long as Sirius XM is viewed as having two distinct pieces, any potential deal will have complications. Essentially, any potential actions with Sirius XM will have to go through Liberty anyway. In my opinion, getting Sirius XM unified in one place is the best possible situation.
Long ago, I sold half of my Sirius XM shares to invest in Liberty. That investment change was very wise. My Liberty stake has performed well and spun off other stock (like Starz (STRZA, STRZB)) along the way that have also performed well. There will be a point in time when the company divulges another offer to take control. It already has an easier path because it owns more now than it did prior. Sirius XM will have its due diligence to perform, and some retail investors will stomp their feet, but this deal has to happen sooner or later. In the last two years, SIRI has barely moved. It is time to get behind one stock instead of being an equity divided. Stay tuned!
*Howard Stern Image Source: Wikimedia Commons
Disclosure: I am/we are long LMCA, SIRI, LYV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.