Tuesday was an eventful day for Sirius XM (SIRI) and Liberty Media (LMCA). It was disclosed in a statement by Liberty that they have now entered into a forward contract to purchase 302 million shares of Sirius XM for $2.15 value for share, or roughly $650 million in value. The nitty gritty details can be found within Spencer Osborne's article here.
Within hours of this news breaking, the whisper had turned into a roar and much speculation (and much panic) ensued. Many investors had expected various situations to occur, with varying results, but it seems that many of the more vocal had assumed Liberty must tender an offer and pay a large premium for the remaining shares it needed to take a controlling stake in Sirius XM. Scan through much of the conversation since February of this year on Seeking Alpha alone, and you'll find comments ranging from $2.50 on up to $10 per share as expected prices Liberty would have to pay.
Because of this expectation by some, many investors were disappointed in the news yesterday that Liberty had paid 'only' $2.15 value on these 302 million shares. For those that were in it for a pop on a Liberty buyout, unfortunately, those hopes were brought to a close for the most part. While Liberty still must acquire 5%, or roughly 300 million more shares to assume control of Sirius XM, it is likely the purchase price for these shares will come in on the lower range as well. It's unlikely Liberty will now pony up $3 a share for that which they could get for $2.15 in a back room deal easily enough.
I have long expected what was announced yesterday. Read my article here, one of my first on Seeking Alpha from months ago, and you'll see my opinion on the subject. Because of this I read the news, shrugged, took a sip of my coffee, and took the day to read investor sentiment from around the web and watch the share price activity. I didn't sell a single share, but it seems that many investors did just that.
There were so many knee jerk reactions yesterday that the price was all over the place. Pre-market? Up to $2.30. Mid-morning? Low of $2.07. Day's close? Right around $2.15.
I think moving forward it's most important to understand what Liberty's move means to the future share price of Sirius XM, both in the short term and long term. Investors want to know what this means for them and their money moving forward.
I'd like to touch upon something that I have seen repeated time and time again from bulls and bears alike, but mostly from the bears who were using it as an argument that Liberty would pay no premium for the shares it needed.
"Liberty has a history of not overpaying for anything. Liberty will not overpay for Sirius XM."
Consider this article written by Crunching Numbers (a bull with a stake covered by $3 January 2013 calls) here where he states :
"Even if Liberty makes a move to take a majority position in Sirius, I do not expect them to overpay for the acquisition."
And I, and others, fully agree with that sentiment.
So if we assume Liberty did not overpay, they either paid "fair value" or they got a deal, and underpaid. Given the fact that Liberty has been adept at getting what they want on the cheap, I would go so far as to say that at $2.15, Liberty underpaid for Sirius XM shares. They obviously see value at the $2.15 price point significant enough to make a purchase. When you consider there were likely fees (and quite possibly significant fees or costs involved with this back room deal), then the price Liberty paid for these shares on a per share basis may even come in a bit higher.
I find it shameful that some bears who have used "Liberty does not overpay" as a bearish argument are now yelling that Liberty created a ceiling at $2.15 and investors should run for the exits. If $2.15 was a ceiling, that would suggest Liberty overpaid, which is absolutely not the case here. My question to them is, which is it? Does Malone never overpay, or did he just overpay? You can't have it both ways.
So what idea can we walk away from on this? Should investors run for the exits? Should investors hold? Should investors buy more?
I say Liberty just created a floor at $2.15, and quite possibly a bit higher once fees for the transaction are known and can be factored in. It's logical:
- Liberty does not overpay and typically purchases at a discount
- Liberty paid $2.15 (possibly more with fees)
- $2.15 is not overpaying and likely a discount price
- $2.15 is a virtual floor, and an excellent buy price moving forward
To me it's clear, plain, simple. I'd love for Liberty to announce today that they secured yet another 300 million shares at $2.15 or $2.20 and could move forward with change of control in a couple of months during the third quarter. Sirius XM is performing well, and Liberty holds all the cards. The sooner they (Liberty) are at the helm, the sooner they can take the virtual shackles off the company and allow it to move into the future.
My money is behind John Malone. He's not a billionaire by accident, and he's certainly no fool. His $2.15 buy of Sirius XM shares should be viewed as a rough floor, and an excellent purchase price for investors moving forward assuming you have a time horizon beyond a few months. This will take a bit of time to play out.