Liberty Media (LMCA) owns preferred shares of SiriusXM (SIRI) that represent an ownership stake of 40% and can be converted into approximately 2.6 billion common shares. When these underlying shares are multiplied by the current market price of Sirius, the extended value comprises more than half of the Liberty market capitalization. As one might expect, Liberty CEO Greg Maffei is often questioned about how Liberty intends to monetize the asset.
It was no different late last month when Maffei responded to questions about Liberty's Sirius stake during both the Liberty 4th quarter conference call and the Deutsche Bank 20th Annual Media and Telecom Conference. The earnings conference call took place on February 23rd, and the Deutsche Bank conference the following Monday.
On the earnings call Maffei indicated that it was unlikely that Liberty would use Liberty shares in an exchange of stock for Sirius, believing the Liberty shares trade at a discount. He also noted that Liberty has issued stock "about three times" in its history and immediately bought back more than that amount. He did state that it was far more likely that Liberty would use cash to gain "hard control," and that Liberty did have significant liquidity, including approximately $2 billion in cash, $1 billion in an unused revolver and another $1 billion in investments in non-core equity investments [An example of a non core asset is Liberty's investment in CenturyLink, Inc. (CTL)].
At the Deutsche Bank conference Maffei spoke at length about the investments made through Liberty Media and Liberty Ventures. He said:
... let me be clear. We have what we view are some core assets at Liberty Media; Sirius, Live Nation, the things we've done with Barnes and Noble. Those seem of a kind more common. Liberty Ventures has no assets that we look at and say we've got to own that and keep that.
Isn't it then reasonable to assume that Sirius is something that Liberty has "got to own that and keep that?" Later on, when discussing the control Liberty had via its 40% stake in Sirius, Maffei continued:
We already have a lot of negative control at SiriusXM ... We have 40% of the board by charter, or by contract rather. We have blocking rights about their ability to issue stock, about their ability to purchase, er, issue debt, their ability to do any acquisitions. We have a lot of controls, negative controls around that company.
Maffei also discussed some of the opportunities available to Liberty if it chose to go to a majority position. These included the ability to control the usage of the cash, rather than just making recommendations. He also said that Liberty might be willing to use more leverage within Sirius, suggesting that the "near death" experience of Sirius three years ago might make the company more reluctant to be as aggressive as Liberty.
Shortly after Maffei spoke, Liberty CFO Chris Shean spoke about the liquidity at the Morgan Stanley Technology, Media, and Telecom Conference, stating:
We have some decisions that need to be made, potentially, with respect to Siri [sic] down the road that may involve buying more in that company. And that would not be a small amount of money.
He continued speaking about the option of taking "hard control" of Sirius by moving to an ownership position of more than 51%.
... you buy up to 51%, you get yourself into a position of hard control, you then can direct how their cash can be deployed and how you then have a systematic shrink there which increases your ownership percent at the Liberty level.
Both of the Liberty executives also indicated that going to 80% in a Reverse Morris Trust to use the Sirius NOLs to shelter other Liberty earnings was a less likely scenario. The cost relative to the benefit of the incremental net present value of the NOLs on other Liberty earnings did not seem significant.
A Sirius investor should expect that Liberty will increase its stake in Sirius to a majority position. The investor should realize that Liberty has more than enough cash, marketable securities and borrowing capacity to accomplish this, and that Liberty sees additional benefits to go to a majority position. Finally, with Liberty seeing Sirius as a "core asset" it is probably unreasonable to assume that Liberty would be willing to participate in a potential Sirius share repurchase program by selling any of the 2.6 billion common shares represented by their preferred shares.