Where do we go from here? That seems to be what many Sirius XM (SIRI) investors have been asking themselves lately. With a week that opened and closed right around $1.85, the back and forth across a few Sirius XM message boards has been speculation on two questions. Why? And where do we go from here?
The first question of "why" is fairly simple to address. Take a step back for a moment. Yes, we know Sirius XM is in demand. We know the financials have been improving, we know cash on hand is increasing, we know debt is being paid down, we know subscribers are growing, we know churn is stable, we know auto sales are up this year over last, and we know Sirius XM is on track again to meet or beat its stated guidance. Analysts all have price estimates on the stock from $2 to over $3, so while the stock sits at $1.85, why is there little to no buying pressure? Why is the stock not taking off from here and shooting to the moon?
The problem? Two main factors. The first being Liberty Media (LMCA), and its piecemeal pursuit of Sirius XM, with quick open market purchases, forward contracts and petitions to the FCC that are enough to make one's head spin when thinking about it all. It's not so simple as Liberty coming out and saying "Hey! We're buying a bunch of Sirius XM! Sell to us please!"
And why should it? As has been proven, they were able to secure hundreds of millions of shares through their first forward contract and open market purchases. Their purchase prices? $2.15, give or take, plus fees. My estimation of fees? $0.15 per share. I'd assume, then, for all intents and purposes Liberty Media sees value in Sirius XM at $2.30 per share sometime in the foreseeable future. For those saying Liberty will not pay a premium for Sirius XM, well, it appears they will be doing so when they close on their first forward contract for 302 million shares on July 6th, 4 trading days away, at roughly a 24% premium to $1.85.
What needs to be understood is this. Yes, Liberty is buying. Yes, it is paying beyond the current share price. But no, nobody has been able to come up with a reasonable conclusion as to what exactly will happen to take Liberty to control. Will the FCC grant de facto control to Liberty as it currently stands? Will Liberty have to purchase more shares in a second forward contract? Is this contract in place now? Is it filled yet? Will Liberty have to convert their preferred stake and add to their position and go to de jure control? What then? Does Mel Karmazin stay or go? What are Liberty's plans for Sirius XM? Does it merge Sirius XM together with Live Nation (LYV) and spin the combined company off in a reverse Morris trust? Does it spin Sirius XM off alone in the same fashion? Is it after the nearly 8 billion in NOLs? Some have even suggested Liberty may be interested in the satellites and spectrum only.
The "why?" Is an answer in itself. Too many questions, "why" included. Sirius XM recently, for the short term, has turned from a story of a company performing well, improving its fundamentals and improving its value over time, to a speculative "what if?" play. With risk, comes lower pricing, and as Sirius XM and Liberty Media battle it out in petitions to the FCC, no matter how well the company does, the stock will be under pressure.
The other question is simply, where do we go from here? And to answer that, I'm a firm believer in the short term that Sirius XM will either trade sideways, or down. It does not matter that my long term view sees greener pastures, sunny days, butterflies, flowers, unicorns (with butterfly wings), and a share price that is significantly higher than $1.85. Until all the questions above are answered (and many others), the stock itself remains a speculative play. In order to stay afloat at $1.85, so long as the questions remain unanswered, the company will have to continue to meet or beat guidance, and the technicals surrounding the share price need to remain neutral to bullish.
As I've noted in articles recently, I do not feel the share price movement will be returning to positive territory in the near term. With an EMA death cross already and a SMA death cross due on Thursday July 5th, the day before Liberty closes on its first forward contract, the technicals are not favorable for the stock. Beyond this I don't feel there will be any blowout news coming through that will trump the Liberty takeover. It's all about Liberty until that is complete. Though bad news will be focused on like a hot poker in the eye.
But there's a bright point of light off in the distance, in my opinion. Once Liberty has control, I actually feel that Sirius XM will be free to move forward under Liberty's guidance. There are many benefits to Liberty having control of Sirius XM, versus Liberty merely having "veto power" over everything and being able to groom the company as a takeover target. After all, it's my opinion that's all these last three years have been since Liberty's friendly loan back in 2009 for a 40% stake in the company. A grooming period, turning Sirius XM into a cash machine with potential ... but leaving that potential for Liberty Media to capitalize on once they are at the helm.
What do you feel Liberty's plans are for Sirius XM? Please share them below and enjoy the discussion over the weekend.