Sirius XM Holdings (NASDAQ:SIRI) CFO David Frear was interviewed at the October 6th FBR Investor Conference. While the usual questions were asked and answered, more time than usual was spent on questions about Liberty Media's (NASDAQ:LMCA) (NASDAQ:LSXMA) ownership, share buybacks and dividends. Usually these questions are just dismissed with statements that it is a board decision or to ask Liberty about their intentions. This article will address only the share buyback topic.
As recently as mid-September CEO Jim Meyer said the following in response to a question about dividends and buybacks:
...we've been authorized by our, number one it's a question our Board will decide okay. But our Board has authorized us to $8 billion of buybacks, it's a pretty big number okay, and as you know we've got a little less than 1 billion of that unused so it would, and so we'll actually give you the exact number at the end of the third quarter. I certainly don't see us changing our philosophy of buying back our stock today because we believe today I think and for our shareholders it's been a wise thing to do. Obviously we have the liberty question, liberty keeps accreting up and up and up they don't participate in the buyback, we've got to assort through that, this can't go on forever obviously right, and so it's not a simple answer but in terms of returning capital to our shareholders, if there's lots of different ways to do it, our Board looks at lots of different ways, we talk about it a lot.
Notice how Meyer said "this can't go on forever". Earlier this month Frear gave a very different perspective. First, he was asked about stopping the buyback if Liberty reached 80%. Frear answered:
There is nothing magic about 80%. I know it's a tax consolidation hurdle. ... First of all, we're out of the NOLs; we only have a couple of more years to go and it will take a couple of more years to get them up to 80%... If we get to 80% there has to be a tax sharing agreement.
Frear then discussed how the agreement would have to be done at arm's length, describing that it had to be fair and make sense to both Liberty and the rest of the Sirius shareholders. He then went on to talk about cash sharing arrangements, stock market forces related to float and discounts and premiums based on Liberty control or illiquidity from reduced float. He concluded,
I don't think there is a transfer of value issue at 80%. ... For me, I don't see any inherent harm in continuing the buyback as long as we feel the stock is attractively priced.
Analyst: So 80% isn't a hurdle. Is there any hurdle? 90%?"
Frear:...It's an interesting argument at 90%. So, if you were to ask a corporate securities lawyer, I think that they would probably tell you that, "No, 90% is not really a hurdle." Because even though they could do a short form merger you're closed out into a - if you don't like the consideration, you have your appraisal rights that you can seek under Delaware law, and so, just as a matter of law, there's no problem.
Analyst: So there's really no hard reason you would stop at any point?Frear: No, I don't think so.
When Frear was pinned down, he stated there was no particular Liberty ownership percentage that would cause the company to halt the buyback programs. Compare this position to what Frear said back in February in response to a Citigroup analyst Jason Bazinet's question:
Bazinet:Can you remind us at what point Liberty's ownership becomes a consideration in terms of the magnitude of buybacks that you'll pursue?
Frear: Well, I mean there's no hard and fast number there, right? So, it's like how much more hard control can you have? Once they're 50%, they're through 50%. So, I know we're not worried about 80% in tax consolidation because before we can get there, we will have used up the NOLs. And so, there's not like an economic transfer from Sirius public shareholders to Liberty shareholders. I think securities lawyers would probably tell you that as you approach 90% that you're going to want to - just like you wouldn't want to buy somebody from 49% to 51% and give them hard control.
I guess Frear was told to talk to some additional securities lawyers since February. For fans of the buybacks, these recent statements by Frear should be an indication that buybacks could continue for quite some time. For fans of a dividend, there is now less reason to expect that Sirius will slowdown buybacks any time soon in order to fund a dividend.
While it may be several years from now, Frear also seems to be telling everyone that there is the very real potential that a Delaware court may get involved in determining the fair price for a takeover of Sirius by Liberty. As an investor, I'm not particularly pleased with the prospect of a Delaware court deciding the premium I would be paid in a short form merger.
Disclosure: I am/we are long SIRI, C.
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.
Additional disclosure: In addition to my long positions, I have January 2017 $4 covered calls written against a portion of my long positions. I also continue to make frequent short term trades on large blocks of Sirius on a regular basis. I may close the current call positions, open new call positions or buy or sell large blocks of Sirius at any time. I have no positions in other companies mentioned in this article.