Sirius XM: Liberty's Preferred Conversion Will Not Dilute The Stock

| About: Sirius XM (SIRI)

By the time we reach the point in our lives where we begin investing, we've probably grown wise enough to understand that rumors can and do exist in this world. "I guess" or "I think" turns into a game of telephone that ends in the original hypothesis turning into a three headed fire breathing monster with a life of its own, constantly being quoted as "fact" when the only fact is that it's simply a rumor.

Rumors in the investing world can actually provide valuable insight assuming that rumor has some basis in reality, but they can also be damaging when they perpetuate misinformation. Sirius XM (NASDAQ:SIRI) is currently the subject of such a damaging rumor that really needs to be squashed once and for all.

The rumor is as follows, and I place FALSE before it so that those skimming this article will not pull the next line out of context:

FALSE: "Liberty Media (LMCA) will dilute Sirius XM's stock if it converts its preferred stake to common shares."

And the actual truth of the matter is this:

TRUTH: "If Liberty Media converts its preferred stake into common shares this will NOT result in dilution of Sirius XM's stock."

This may not seem like a big deal to some, but when article after article and comment after comment around the net state that Liberty will dilute Sirius XM's stock, it perpetuates the fire breathing monster and does a great disservice to investors.

The truth of the matter is very important here.

  • Liberty Media currently holds preferred shares which are convertible into common shares comprising a 40% stake in Sirius XM.
  • In pursuing "de jure" control of Sirius XM, Liberty has stated to the FCC that it will convert these preferred shares if necessary to obtain FCC approval of the control transfer.
  • If the FCC requires conversion, Liberty will convert its preferred stake into shares up to the full amount the FCC requires them to convert.
  • Upon conversion the outstanding share count for Sirius XM will increase, and the market cap will also increase on the various finance sites around the net because these sites erroneously do not consider Liberty's preferred stake in their calculations.

And this is all that happens. There is absolutely no dilution because Sirius XM has always considered Liberty's preferred stake in earnings reports. This is why they report "diluted EPS."

To have dilution in the way many people are suggesting would require Sirius XM to print an additional 40% worth of shares, and release them into the open market. Obviously that is not going to happen. No new shares are being printed, and no dilution will occur.

It should also be noted that even after conversion, Liberty must retain these shares going forward in order to perform a Reverse Morris Trust. Those suggesting Liberty will convert and then sell are again perpetuating the rumor and severely misinformed.

As investors we read about various stocks which hold our interest in order to find bits and pieces of information which can help us in our investing decisions. But as investors we must be aware that not everything we read is factual and true. It's up to us to do our own research and understand not only the securities we are invested in, but also the vast array of information, good and bad, which is out there.

Read, decide, invest. It's right at the top and Seeking Alpha's motto. I've highlighted the most important part.

Disclosure: I am long SIRI, LMCA.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Broadcasting - Radio
Problem with this article? Please tell us. Disagree with this article? .