The Satellite Radio Investors Quandary - Sirius XM Or Liberty Media

Includes: LMCA, LYV, SIRI
by: Spencer Osborne

I have been weighing the merits of this issue for quite some time and am surprised that other investors are not yet bringing this issue up for discussion. If you want to invest in satellite radio should you invest in Liberty Media (NASDAQ:LMCA) or Sirius XM (NASDAQ:SIRI)?

This is an issue that investors should be actively considering now. Whether you are invested in SIRI, LMCA or considering an investment on satellite radio, you need to be thinking about the best place to put your money.

For satellite radio investors the last time a decision like this arose was prior to the merger. At that point XM investors received a small premium. Back then, betting that the merger would be approved, I sold all of my Sirius stock and put that cash into shares of XM. Upon merger approval I got a small bonus as the XM shares were converted to Sirius XM shares.

In considering this issue we need to arrive at educated assumptions, measure risk factors, and try to guess what the outcome will be. This is not always easy, and there are no guarantees, but by working through the process you will increase your chances of success, or at least be more prepared as the events surrounding Liberty Media and Sirius XM unfold.

Some Basic Assumptions I Have Made

  1. Liberty Media will ultimately gain a controlling interest in Sirius XM
  2. Liberty Media will eventually control the Board of Directors at Sirius XM.
  3. Liberty Media as an entity is more diversified than Sirius XM.
  4. Liberty Media would like to conduct a Reverse Morris Trust for the tax benefits offered from the transaction. Sirius XM will agree to terms at some point.
  5. Sirius XM makes up a substantial part of the value of LMCA stock (as much 65%).
  6. If Liberty spins off its stake in Sirius XM to Liberty shareholders it will create a devaluation of LMCA stock. This would impact the price of LMCA.
  7. Shareholders in LMCA would get the benefit of shares in Sirius XM.
  8. Liberty Media will not saddle Sirius XM with debt or issues that would take away from the profitability prospects of the company.
  9. A now more autonomous Sirius XM will continue to grow, albeit with a Board of Directors that is installed by Liberty Media.
  10. Sirius XM will utilize the Net Operating Losses (NOL's) and Liberty Media will not try to move to 80% as there will be no need to do this.

Based on these assumptions I can foresee that possible benefits could be on both sides of this equation with perhaps Sirius XM shareholders getting a very modest premium from the negotiations for a Reverse Morris Trust. From this perspective it would seem to make sense that an investment in SIRI is the better play.

The flip side of the coin is that a LMCA shareholder will receive the benefit of getting SIRI shares when a spin-off is conducted, but will still have Liberty shares to boot. From this perspective it would seem that Liberty Media's stock may be the better play. In addition Liberty Media is in the middle of a $1 billion stock buyback program. Once the Sirius XM stake is spun off, Liberty Media can buy a ton of its own stock at discount prices as it also increases its stake in Live Nation (NYSE:LYV) and works on moves with its stake in companies like Barnes and Noble.

As you can see there is an interesting dilemma happening for investors. Where is the best place to put your dollars? If it were me I would consider putting half of my stake on each side of this equation, follow the news, and be ready to make a move based on that news. Likely, if you want to play this you will need to make a decision before anything gets announced. Personally I have not traded Sirius XM in years. It is now getting to the point where I am giving serious consideration to splitting my satellite radio investment equally between Sirius XM and Liberty Media. In my mind I then have a safety net of sorts in place and could still have some time to make an adjustment based on news.

Is my 50/50 strategy a sound one? Only time will tell. It is the exact strategy I used many years ago when Sirius and XM were separate companies. It paid off well then, and I suspect that such a strategy will work again.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in LMCA and no position in LYV