Sirius XM: Liberty's Second Forward Contract

Includes: LMCA, SIRI
by: Stephen Faulkner

It is well known now that Liberty Media (NASDAQ:LMCA) has announced it currently has a forward contract with an undisclosed third party to acquire 302 million shares of Sirius XM (NASDAQ:SIRI). The expiration date of this contract is fast approaching, with only 9 trading days left until the expiration date of Friday, July 6th, and a settlement date of Wednesday, July 11th.

Back in February I had written an article here on Seeking Alpha which outlined what I expected to happen. Rather than tender for shares on the open market, I hypothesized, I had expected a back door deal for these shares through a third party. Liberty did not disappoint.

As it stands right now, Liberty Media is obviously aiming for control of Sirius XM. It is my opinion that regardless of their filing with the FCC for "de facto" control, that their intentions are to go to "de jure" control. In order to do this, they'll need to purchase more shares, either on the open market, or again, through another forward contract. It should be no surprise that my expectations are that investors will soon hear that Liberty has another forward contract for the shares needed to go to de jure control of Sirius XM, and take their stake beyond 50%.

Consider what I wrote in February:

I expect that Liberty will take advantage of a back door, which does not require it to enter into a bidding war for whatever percentage of Sirius XM it wishes to increase its stake to. I expect that Liberty, as of this writing (February 25th, 2012), has already made moves to acquire the vast majority of what it seeks in the future. To expect the more obvious suggestions that Liberty will have to purchase shares on the open market, or to accept what I feel are absurd suggestions, that Liberty will have to enter into some bidding war vs. another major player in order to acquire their stake, is folly.

I find it interesting that some still hold on to the belief that Liberty will have a difficult time obtaining the additional shares it needs, and thus need to drive up the share price of Sirius XM in a buying spree. I believe that's setting oneself up for disappointment.

For investors I think the best thing one can do is to attempt to look ahead and ask themselves what makes the most sense. A second forward contract, in my mind, makes far more sense than a bidding war or open market purchase, or even a tender offer for shares. Investors should take solace in the fact that Liberty obviously sees value at the first forward contract price of $2.15 per share, plus undisclosed fees which will make their price per share higher. Crunching Numbers had a nice article detailing some positive thinking over the weekend.

Whatever Liberty's plan is, eventually, and likely soon, the cards will be laid out on the table for all to see.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SIRI, LMCA over the next 72 hours.