Liberty Media Buying Sirius XM Shares Up To $2.19 Amidst Street Confusion

 |  Includes: LMCA, SIRI
by: Stephen Faulkner

I want to start right off with a quote from the famous Peter Lynch :

Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.

Every single time I visit the SEC Form 4 website I am greeted by this quote, and the past few days have given me confirmation that at current pricing levels, Sirius XM (NASDAQ:SIRI) is an absolute steal. My confirmation has been Liberty Media's (NASDAQ:LMCA) actions.

To see what I am talking about, please visit the following links:

The short story is a combination of my article from earlier here where Liberty disclosed in their first quarter conference call that they had entered into a forward contract to purchase 302 million shares of Sirius XM, and the new filing Wednesday exposing that they have now purchased another 60 million shares on the open market Tuesday and Wednesday at prices as high as $2.19 per share.

Liberty now is just 240 million shares away from control of Sirius XM. It's a virtual stone's throw away, and it is my opinion that they will be able to acquire these shares before the Sirius XM shareholder meeting on May 22, 2012.

My belief that supports this is that the forward contract has now completed the initial hedge, and an expiration date has been set. Consider the following from the Form 4 filing by Liberty Wednesday:

  • 4. On December 30, 2011, Liberty Radio, LLC, a wholly-owned subsidiary of the Reporting Person, entered into a forward purchase contract (the "Forward Contract") with an unaffiliated counterparty covering up to a maximum of 315,000,000 notional shares of the Issuer's Common Stock. The exact number of shares to be covered by the Forward Contract is to equal the number purchased by the counterparty to establish its initial hedge.
  • 5. The Forward Contract provides for physical settlement upon expiration, with the Reporting Person retaining the right to elect cash settlement instead. In the case of physical settlement, the "forward price" will equal the value average weighted price of the shares of the Issuer's Common Stock during the initial hedging period plus a commission (the "base price"), plus an amount equal to the counterparty's internal funding costs plus a spread. If cash settlement is elected, (i) if the cash settlement price (which would be based on the price at which the counterparty unwinds its hedge) exceeds the forward price, then the counterparty will be obligated to pay the difference to the Reporting Person, and (ii) if the cash settlement price is less than the forward price, then the Reporting Person will be obligated to pay the difference to the counterparty.
  • 6. On May 7, 2012, the unaffiliated counterparty completed its initial hedge, and the number of notional shares of Common Stock covered by the Forward Contract has been fixed at 302,198,700 shares. Under the Forward Contract, the expiration date is to be July 6, 2012, or 60 days after the completion of the counterparty's initial hedge. The base price under the Forward Contract is approximately $2.15 per share.

That can be a bit confusing, so I'd like to cover a few points.

First and foremost. This forward contract has completed the initial hedging period and while it expires on July 6, 2012, it does not appear that it can't be called early. Because of this I believe Liberty can and will exercise the contract and take delivery of the shares before the share holder meeting on May 22. With Liberty's purchase of 60 million additional shares, they need only 240 million more shares for a controlling stake. I expect that Liberty will purchase these remaining 240 million shares on the open market, or negotiate deals for these shares before the shareholder meeting.

I also expect a rapid re-filing by Liberty of the request for de facto control of Sirius XM with the FCC. At this point they will have the passwords and necessary information to file properly, as well as actually holding true "control" of the company.

Investors can breathe a sigh of relief as one more "maybe" will have turned into a reality. For those who expected a cash tender offer for the shares, you may be disappointed, but I believe the important thing to consider here is Peter Lynch's quote above, as well as the often stated mantra of bulls and bears alike:

"Liberty will not pay a premium."

In purchasing enough shares for a controlling stake in Sirius XM, Liberty has shown that they have faith in the company and that they see value going forward. Liberty absolutely would not buy into the company if, as some bears state, Sirius XM were on a path to obscurity. Liberty obviously sees considerable value in Sirius XM to the point where they should be committing over a billion dollars into the company. If that's not a vote of confidence, I don't know what is.

Beyond this, consider the price which Liberty is paying. They have purchased shares as high as $2.19, and there is nothing that indicates they will not pay more. Since Liberty "never pays a premium," one can assume they are buying at a discount. One can then arrive at the logical conclusion that at these prices, Liberty believes the shares to be undervalued and that they hold significant future value for them moving forward.

What also must be considered is that this forward contract contains other fees, as outlined in section 5:

In the case of physical settlement, the "forward price" will equal the value average weighted price of the shares of the Issuer's Common Stock during the initial hedging period plus a commission (the "base price"), plus an amount equal to the counterparty's internal funding costs plus a spread.

The base price has been established in section 6:

The base price under the Forward Contract is approximately $2.15 per share.

Beyond the base price of $2.15 is added "an amount equal to the counterparty's internal funding costs plus a spread."

This could be $1, or tens of millions of dollars. We don't know the answer yet but it is safe to say that with these additional costs, Liberty is actually paying more than $2.15 per share. If the internal funding costs and spread total $30 million, for instance, Liberty is effectively paying $2.25 per share.

From my article earlier, I laid it all out very clearly:

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.

It appears that my wishes have partially come true with Liberty's announcement Wednesday of another 60 million shares acquired. The pieces of the puzzle are all coming together and the picture is clear. Liberty had a back door deal all along. The massive positive money flow we have seen since January 1st has been bolstered in part by Liberty's back door deal, and the near record positive money flow today was largely due to Liberty's 60 million share purchase. Liberty needs 240 million shares, and it's likely they will be buying them up or locking in deals for them over the next week.

Consider also that roughly 600 million shares will have been removed from the public float and placed into the pockets of Liberty Media for safe keeping. The stock market is dictated by supply and demand, and this is the removal of nearly 16% of the float, or supply. That should bolster the share price on reduction of supply alone. This is a very real catalyst, not some superficial rumor or guesstimation. It's one which could set off the cup and handle formation we have been in for the better part of an entire year, and return Sirius XM to its previous trajectory at $2.75, or even higher.

When and if that happens, and when and if any of the speculation in this article happens, remains to be seen. One thing is for sure, the cards have been pretty much laid on the table at this point. Liberty has shown their hand.

I would be absolutely kicking myself had I sold in a panic on Tuesday and Wednesday. I'll be seeking an entry on Thursday with what I have set aside in cash from selling my Pandora (NYSE:P) puts a few days ago when Pandora crossed the 20 day moving average. Everything is falling into place, and as it becomes obvious or known to the street, I expect the price to react accordingly.

My money is with Liberty, and I am glad to pay what they are now paying. "They never overpay!" Ask your local Sirius XM bear. They've been screaming it for months.

Disclosure: I am long SIRI, LMCA.

Additional disclosure: I am long SIRI June $2 calls.