Seeking Alpha
Profile| Send Message|
( followers)

by Morgan Smith

In recent months, a lot has been made of the bid by Liberty Media (NASDAQ:LMCA) to acquire Sirius XM Radio (NASDAQ:SIRI). The chatter regarding the acquisition accelerated further in recent days after it was learned that incumbent SiriusXM's CEO, Mel Karmazin, had sold shares ahead of Sirius XM's Shareholders' Meeting on May 22.

With Liberty Media already holding onto 46% of Sirius XM, it only seems to be a matter of time before it is able to acquire the remaining 5% that it needs to make the acquisition a fait accompli. Indeed, Karmazin's actions strongly suggest that Liberty Media may already own the required number of shares and new directors might be introduced at the Shareholders' meeting to pave the way for Liberty Media's takeover of Management.

Interestingly, Liberty Media had already attempted to take control of Sirius XM's licenses earlier through the Federal Communications Commission but failed, which is why it has been acquiring Sirius XM shares in the open market in the first place.

Naturally, with the share price hovering at below $2, Sirius XM's shareholders are hoping that Liberty Media will pay the implied cap of $2.15 per share on their holdings at some point in the future. That represents a premium of around 9% over the current price of Sirius XM shares - and is, interestingly enough, more than the $1.99 that Karmazin reportedly received for his shares.

That's unlikely to happen; why should Liberty Media expend valuable financial resources to acquire a further 29% of Sirius when 51% is enough for it to push Sirius XM along the direction it desires? As it stands, prior to the acquisition of a further 6% stake, Liberty Media had already invested $530 million in Sirius XM.

Consequently, it's not surprising that Sirius XM's stock has stayed at $2 despite the implied forward price of $2.15 on Sirius XM shares that Liberty Media agree to acquire recently.

Given all this, one has to ask, "what's does Liberty Media get from Sirius XM?"

Primarily identified as a media company, Liberty Media has interests in assets operating in industries as divergent as Television, Film, Sports, and Location Services - on top of its existing stake in Sirius and smaller stakes in larger entities such as Time Warner (NYSE:TWX) and Viacom (NASDAQ:VIA).

Excepting TruePosition, which provides location services to T-Mobile and AT&T (NYSE:T), the majority of Liberty's assets are in so-called "old media" industries like broadcast and cable television. Those industries remain robust but their growth rates are in the single digits. That contrasts with the 30% growth in Digital Radio - and that, ostensibly, is where Sirius XM fits into Liberty's portfolio.

Sirius XM increased its paid subscriber base by around 299 thousand in its most recent quarter, bring its total subscriber base to just under 22 million. After Sirius and XM merged in 2008, the combined entity has essentially become a monopoly in the Satellite Radio industry, collecting 90% of all subscription fees paid for radio.

Interestingly, the only other companies that sell as many paid media subscriptions in the United States are Netflix (NASDAQ:NFLX) and Comcast (NYSE:CCS).

Its monopoly in Satellite Ratio notwithstanding, Sirius XM appears to be a relative bit-player in the Internet Radio market, where Pandora (NYSE:P) allegedly has 150 million subscribers while its competitor Spotify, which is deeply integrated with Facebook (NASDAQ:FB), has between 10 or 20 million subscribers.

A closer look at the numbers suggests a different story, however. Many of Sirius XM's subscribers have access to its Internet streaming service and new subscribers can opt for a cheaper Internet-only access. Even assuming that only 10% to 15% of Sirius XM's 22 million subscribers use the Internet as a means of accessing it offerings, that would give it anywhere from 2.2 to 3.3 million paid Internet Radio listeners.

That's an impressive considering that Spotify has just 3 million paid subscribers. Pandora's number, meanwhile, is the most deceptive - the 150 million users it boasts of represent its total number registered users - not the number of subscribers to its premium Pandora One service.

In its fiscal 3rd Quarter Pandora earned $9 million in its most recent quarter from subscription fees, implying that just around 1 million of its registered users are Pandora One subscribers - or less than 1% of its proclaimed number of users.

As such, depending on the assumption on Sirius XM's Internet-using subscriber base, it could be either 1st or 2nd in the Paid Internet Ratio space.

Meanwhile, using apps for popular platforms such as Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iOS, on top of tie-ups with various consumer audio companies such as JVC and Kenwood and automakers like Ford (NYSE:F) and BMW, Sirius XM has been making itself a ubiquitous presence in the consumer media space. That's critical, especially since Sirius XM's top-line subscriber growth is trending at a rate of just 5%.

One of Sirius XM's main selling points has been its exclusive content, which is being threatened by the potential departure of Howard Stern. In theory, being aligned more closely with Liberty's interests - and its media-generating units like Starz - could pave the way for Sirius XM to acquire more exclusive content to mitigate the loss of any exclusive content.

That said, the particular strengths of Liberty Media's existing media assets suggest that this might not work out. Indeed, it seems more likely that Liberty intends to use Sirius XM to fill the gaps or complement parts of its portfolio.

Specifically, the FCC's recent proposal to remove restrictions on frequencies that companies like Sirius XM have franchises to may enable it (or any entities it partners with) to provide backhaul services to TruePosition's existing mobile partners like T-Mobile and AT&T. That's an especially lucrative position to be in considering that mobile broadband traffic is forecasted to nearly triple by 2016.

Conclusion

Liberty Media's acquisition of a majority stake in Sirius XM seems all-but-certain with the latter's recent insider activity.

That said, while it's not certain what Sirius XM will be getting from Liberty Media, it's fairly certain what Liberty will be getting from the former: leadership in the Satellite Radio and Paid Internet Radio spaces - and the prospect of lucrative deals in delivering backhaul services to Mobile networks.

Sirius XM Radio is currently trading at a Price-Earnings (P/E) Ratio of close to 25x - despite the fact that has been in the doldrums for the better part of a year. That's a richer valuation than the S&P500 but just a tenth of Pandora's forward P/E of 251x.

In short, Sirius XM is neither cheap nor particularly compelling to buy - even Liberty Media's impending takeover may have more to do with other business opportunities than anything Sirius XM has to offer under it current business model.

Consequently, I see Sirius XM continuing to underperform the broad market and consider anything more than a 10% upside for the stock in the next 15 months a bonus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Sirius Investors: Don't Expect More Than 10% Upside Over Next 15 Months