SiriusXM (NASDAQ:SIRI) investors have seen the company perform remarkably well in terms of financial metrics, but have not yet really seen that value translated to the stock price. There are many reasons that this may be the case, and in my opinion one of them is the overhang related to the Liberty Media (NASDAQ:LMCA) stake and how that could impact certain moves. That being said, there could be several driving factors at play that investors could spends hours debating about.
Over the past few month I have been exploring the possible timing of events that could get the SiriusXM equity under one roof, and assessing the timing of such an occurrence. In my opinion this could happen as soon as the end of 2016, or as far off as 2018. I find it prudent to understand the possible dynamics sooner rather than later.
In this article I am going to focus on the share buyback program and the possibility of dividends. First things first. The stance of SiriusXM management may not always be in full agreement with the SiriusXM Board of Directors. In my opinion we could see some matters come to a head in the next several quarters. While at the moment the two sides of this issue are aligned, there could be a time when that alignment begins to skew.
For the purpose of this article I am going to work with realistic yet very rounded numbers. I am going to assume that SiriusXM will expend $500 million per quarter in either buybacks or dividends. I am going to assume that after all employee incentive programs and stock programs that the net number of shares taken out of the float through buybacks will be 100 million. This article is not about getting to exacting detail at this stage. It is about outlining a concept and assessing when and why SiriusXM management may want to shift to a dividend strategy rather than a share buyback strategy.
In the chart below you can see the what these assumptions will deliver in terms of the share buyback program and the Liberty stake. In concept, by the end of 2017, the Liberty Media percentage of ownership could be approaching 75%. At 80% ownership Liberty could essentially make a move that does not even require the consent of the minority. As you can imagine, there is a critical point in Liberty's ownership that is quickly approaching.
Chart Source - Spencer Osborne
Now, let's assume that SiriusXM management winds the debate with the Liberty controlled Board of Directors and initiates quarterly dividends in 2018. Let's expand the hypothesis and assume that Liberty uses its cash dividends (after taxes) to buy SiriusXM shares, thus increasing ownership to work toward being above 80%. If SiriusXM dedicates $500 million per quarter toward dividends (about $0.12 per share), Liberty would realize 75% of that money. This means Liberty would get $375 million. If we assume 35% tax on that money, Liberty would be left with about $244 million. If we assume that SiriusXM stock is $4.75, then Liberty could increase its stake by about 51 million shares per quarter. The chart below shows a possible timeline of Liberty reaching 80% ownership.
Chart Source - Spencer Osborne
As you can see in the chart above, Liberty would be able to use proceeds from dividends to achieve 80% ownership by Q1 of 2019. Now I will outline the problem with that thesis. Liberty would pay $130 million per quarter in taxes on dividends. Essentially, in the example above, $650 million over 5 quarters would be paid out in tax. From a Liberty Media perspective, it is far better to spend that type of money on making a deal work than to pay it out in tax. From a Liberty media perspective, you can see why they are not very excited about the prospects of dividends.
Essentially, the drop dead date on making something happen in terms of getting SiriusXM under one roof is at about the time Liberty media ownership hits 75% or so. That will be the point in time where there could exist a conflict between a fiduciary responsibility of SiriusXM to act in the best interest of its shareholders vs. the agenda of Liberty Media. Essentially, it could be argued that buying back shares after that point is "handing the company over" to Liberty.
As you can now see, time is beginning to catch up with things at SiriusXM, and time is beginning to catch up with what Liberty Media may want to do with its stake in the company. I anticipate that the company will seek approval for another $2 billion in buybacks, but after that a new direction may need to be considered.
The bottom line is that the share buyback vs. dividend issue is already the elephant in the room that many are avoiding discussing. Make no mistake, this issue is a top priority at Board meetings and it is not just the SiriusXM Board that has skin in the game. The Liberty Board meetings, which has many of the same members, is looking at the issue closely as well. As time passes it may get more difficult for the common Board members of each company to truly act in the best interest of each set of shareholders.
In my opinion Liberty Media would want to see a dividend held off for as long as possible, and may act in a preemptive manner to make a move that is far more tax friendly for all involved. The matter has complexities, and several models could be developed. My intent was to truly to allow SiriusXM investors to see some of the dynamics at play and how quickly these dynamics will become a central part of any SiriusXM investment discussion. Stay Tuned!
Disclosure: I am/we are long SIRI, LMCA.
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.