Sirius XM Radio Inc. (SIRI) investors currently wait for an answer to the question of what drove the sharp 10.9% rise in share price from Monday morning's open to Tuesday's close at $2.04. Likewise, there's another burning question. Will it continue?
The second question will be answered over time, and while my sentiment currently stands at "yes," it is important to consider that gains so quickly received can just as quickly be taken away. Proceed with caution for now, but given two days of gains on strong volume, it does seem reasonable that this may be the turnaround from the recent bottom that investors have been looking for.
For me, as I expect Liberty Media Corp. Capital Cl A (LMCA) is the driving force behind the current buying activity, the questions become, "What happens when Liberty stops buying?" "What happens once Liberty has its fill?" "Will there be other buyers?" I think the answer here is "yes," and I think the biggest buyer once Liberty is done is an entity investors know like the back of their hands: Sirius XM.
For a moment let's assume the expectation that Liberty will go to at least 51% and take control is correct. Liberty signs off on that dotted line, takes possession of its newly purchased shares, and Sirius XM is for all intents and purposes in Liberty's hands. What then? For those who suggest Liberty is seeking control of Sirius XM to play pirate and pillage and burn the company for its satellites and spectrum, I have to question whether or not they're serious when they say that, or merely seeking to push investor's buttons. I am a bit more optimistic.
I see one of the first orders of business by Liberty to be rather obvious. Share buybacks. Sirius XM has what some consider to be a massive public float of 3.8 billion shares. With over a billion in cash on hand by year's end, and enough cash flow to cover debt payments as well as cost of operations, Sirius XM is in a prime position for a share buyback to reduce its public float and reward investors for their patience. Who is the biggest investor? Liberty Media. It just makes sense.
Consider what it could mean for Sirius XM to see around 500 million shares removed from all shares outstanding. There are a total of *roughly* 6.34 billion shares outstanding, considering Liberty's preferred stake. While simple math now may not have the exact result in the future, it's a great way of making an approximation. The removal of 500 million shares from 6.34 billion shares will result in shares outstanding being reduced to 5.84 billion, which places the share price which currently sits at $2.04, at $2.22. This also changes earnings per share, P/E ratios, etc., going forward to the positive.
I believe this may have greater effect, though, than a mere 9% rise. While the above example is cash neutral, at times things are not so simple. Depending on your sentiment, the effect may be a bit higher and I see two other possible price increases that may take effect. If considering the removal of 500 million shares from the public float has effect based on the actual 3.8 billion shares within the public float, then the share price could see appreciation from $2.04 currently to $2.35, or 15%.
The third effect considers that currently 50% of the public float is held by institutions, bringing the retail public float to 1.9 billion shares. If the pricing is dictated mostly by retail, the reduction in these shares from 1.9 billion to 1.4 billion could cause the share price to rise from $2.04 currently to $2.76, or 35%.
While the third case is extremely bullish, I believe the first case to be rather conservative, and I see the increase over time as having an effect somewhere between 15% and 25% over the life of the buyback. One must consider that buybacks often happen over time and are not an overnight occurrence, thus the effect may be spread out and difficult to accurately calculate if and when it happens.
One must also consider that if a share buyback is announced, and of the current 300+ million shares held short which are not hedged will be put under pressure to cover. A simple announcement of a share buyback may set off a buying spree which sends shares of Sirius XM up in short order.
Is this merely a wish and a prayer from this author who has just jumped back in at $2.02? Perhaps, but I believe it is a reasonable expectation that a share buyback will be one of Liberty's first orders of business. Not only does it increase Liberty's stake organically, but also improve the value of the stake Liberty already has. Assuming it owns 51%, 51% of that share buyback essentially goes into Liberty's pockets. The wealth is spread evenly among all investors, and as one of those investors, I certainly wouldn't complain about some of that pent up wealth being spread around if a proportional amount of it finds its way into the value of my investment.
Disclosure: I am long SIRI.
Additional disclosure: I may initiate a long position in LMCA at any time.