Sirius XM (NASDAQ: SIRI) looked to be at the end of its rope when it plunged in mid May to as low as $1.85. Moving sideways until the beginning of July, it has found new life. Let's take a look at the company again and see what new developments have taken place to liven it up and how old challenges have evolved in recent months.
Analyst Bullish on Sirius XM
ISI Group analyst Vijay Jayant started coverage on Sirius XM. What astounded me was the price target of $2.80. Was this a ploy that will later be downgraded to attract potential investors? While the company has struggled, it also must be noted that it does have 23 million subscribers and it is the only satellite radio station. There are some significant details to summarize about the company that attracted the ISI Group:
- It has OEM distribution agreements with all major automobile manufacturers
- Its radios are currently installed in more than 60% of all new vehicles
- Generally, about 45% of those installed radios are activated as paying customers after a promotional period
The analyst goes on to point out that for the automotive market Sirius is the only major option right now. Sales for autos are improving and this is increasing the company's revenue. He goes on to mention that it could also be involved in a stock buyback going into 2013 which could last a number of years. The process would unfold as Liberty Media (LMCA) continues to provide signs of interest in plans for "tax-free monetization" of its 46.2% stake in the company.
Will the Reverse Morris Trust Exchange Occur?
Liberty is still interested in distributing its shares in Sirius tax free through the Reverse Morris Trust process, and for this reason it would like to bump its share level over 50%. This is where a small feud has been taking place according to Barclays analyst James Ratcliffe who also has raised Sirius XM's rating to Equal Weight from Underweight.
For those of you who want to know what a Reverse Morris Trust is and how it affects what is going on between these companies, I will summarize here for you. When a company (parent company) that owns enough controlling "voting stock" in another company can influence that firm enough to control management through influencing or electing board members, the second company is considered a (sub-company) of the first. In this case it would be Liberty attempting to become a parent company of Sirius through acquiring stock. The parent company completes a spin-off of a subsidiary to the parent company's shareholders. Under Internal Revenue Code section 355, this could be tax-free if certain criteria are met. The former subsidiary (now owned by the parent company's shareholders but separate from the parent company) then merges with a target company (Sirius XM- as we know it today) to create a merged company.
Sirius (the former subsidiary) becomes the "buyer" if its shareholders (also the original parent company's shareholders) own more than 50% of the merged company. This is where a minor feud is taking place as both companies negotiate how much the control premium [to effect a deal] would need to be.
If you did not know this, Liberty came in and made its investment in Sirius when it was trading at 10 cents per share and helped it avoid bankruptcy. With all this talk about a Reverse Morris Trust, the Feds have yet to approve the deal and taxes are the snag. Investing at 10 cents a share, the tax ramifications on a stock now at $2.18 is huge. A tax free transaction is the only interest Liberty has right now and it is looking at a number of other options also-including a stock buy back.
A Reverse Morris Trust is not a rare occurrence. When Verizon (NYSE: VZ) sold its access line to Fairpoint, it created a subsidiary and sold its assets to the subsidiary, distributing shares of the new company to Verizon shareholders. They then completed a Reverse Morris Trust with Fairpoint. As its works with this trust, Verizon shareholders had the majority ownership in the new merger and Fairpoint management ran the new company. When all was said and done, Verizon was able to divest itself of its access line tax free. This is what Liberty wants to do with Sirius and negotiations over share control are still ongoing.
Liberty maintains the upper hand in negotiations because it can assume control at any time, given its existing 46% ownership stake and some analysts believe it could happen by year's end. The RMT may result in the huge buyback of Sirius stock I mentioned earlier as long as cash flow remains strong.
What Should Investors Do Now?
I don't think the Reverse Morris Trust will have a huge impact upon the stockholders as much as it may dilute the value of the stock. But in terms of investing, I believe an investor should put the decision making process of owning this stock upon the automotive industry. Look at where the automotive industry is going and also sales forecasts since this company is so tied to the industry. If the outlook is good, then now might be a good time to consider entering a position.