Liberty Media (NASDAQ:LMCA) investors that are interested in the company's stake in SiriusXM (NASDAQ:SIRI) had a pretty good week last week. The satellite radio trackers (NASDAQ:LSXMA) and (NASDAQ:LSXMK) saw value appreciation that outpaced the underlying satellite radio equity during the past week.
Tracking stocks typically trade at a discount to an underlying equity and are often slower to react to moves that an underlying equity may have. What makes the Liberty Media SiriusXM trackers so compelling is the fact that Liberty controls about 64% of SiriusXM stock and has expressed multiple times a desire to get the satellite radio stock under one roof.
The issue sometimes puts SiriusXM investors and Liberty Media investors at odds, but over the last few years most SiriusXM investors have come to realize that the benefits of getting satellite radio into one place likely outweigh which side of a deal gets the modest premium.
Liberty Media has seen its stake in SiriusXM increase with each passing quarter. Liberty has seen this happen without having to buy more shares. SiriusXM has been in the midst of a massive share buyback program for the last few years. The pace of buybacks is typically between $500 million and $600 million in each quarter. These buybacks increase the percentage of ownership of any shareholder that does not sell into them. Liberty media is not selling and thus see's its ownership level increase as each quarter passes.
With Liberty media now at 64% ownership and with just $1.1 billion left in the current buyback program, we are at a stage where things could get quite interesting with regard to what SiriusXM does and what Liberty Media does.
In my opinion the first thing that will happen is an announcement of adding another $2 billion to the stock buyback program. This amount will likely get Liberty media to within striking distance of 75% ownership, but far enough away from 80% that it can not be considered that Liberty is carrying an influence on the board that is not in the best interest of minority holders.
The relative discount that the trackers are trading at could influence the type of move Liberty makes, and even the timing of any move. Typically an assessment of Net Asset Value would be utilized to assess the relative discount, but coming up with an NAV on the fly throughout a quarter could be challenging as many assumptions would need to be made.
In order to assess things at virtually any point in time, we can look at the simple market cap data and compare ratios. There is a bit of complexity here because Liberty actually created three classes of shares in its trackers. To simplify this I have created a spreadsheet that blends the data.
In the chart below a ratio is created for Liberty SiriusXM A series and C series shares. A blended ration is then created. The B series shares are held mostly by John Malone himself and are not liquid. The lower the line goes in the chart below the bigger the discount that the trackers are trading at. The higher the line gores, the more narrow the discount. In my opinion a low discount would tend to lead to a buyout offer, while a high discount would lend itself to a hard spin.
Chart Source - Spencer Osborne
What you can see in the chart above is that the discount of the trackers had been getting bigger. Essentially the multiple between the trading price of SiriusXM and the trading price of the trackers was low. Over the past week we saw the trackers perform better than SiriusXM. In fact, the climb has been stark. Perhaps an easier way to see the narrowing of the discount is simply looking at the stock comparisons.
Chart Source - Yahoo Finance
At this stage the "pent up value" is the discount. That number, with debt and cash considered is at about $2 billion right now. The lowest that discount has been was about $1.5 billion. The highest the discount has been was about 2.32 billion. Essentially, the value that the Liberty trackers are trading at is 16.2% less than the actual value of the SiriusXM stock held. At the beginning of last week the discount was almost 18%.
In my opinion things could get very interesting at any time. With the SiriusXM stake now separated out from Liberty Media, the street can build valuation models much easier. This also makes for some pretty compelling trade situations. Investors can blend ownership between the trackers and the underlying equity, use options in one to hedge another, and even make a play on what they believe will be the stock with the best potential for bolder moves.
SiriusXM had moved up to above $4, but has since retreated. Stock prices below $4 are helping Liberty out in its quest to gain ultimate control. As long as SiriusXM is viewed as being undervalued, the biggest way that the company can correct that assessment is to buy back shares. Some investors and analysts are speaking about dividends, but in my opinion the tax penalty on dividends is not favorable to any shareholder at this juncture.
I see the company approving an additional $2 billion in buybacks and waiting on dividends until 2018 at the earliest. Stay Tuned!
Disclosure: I am/we are long LMCA, SIRI, LSXMA, LSXMB.
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.