With yesterday's announcement that Sirius XM (NASDAQ:SIRI) CEO Mel Karmazin has adopted a new 10b5-1 plan to exercise another 30 million options and sell the shares, investors have one more piece of information to consider. It is not enough that Sirius XM's largest shareowner, Liberty Media (NASDAQ:LMCA), is moving towards a hostile takeover of Sirius XM, or that there are ongoing filings with the FCC for consent to transfer the licenses, or that Karmazin is not disclosing if he will be staying or leaving when his contract expires at the end of the year... Now investors have one more factor to consider - Why is Karmazin selling?
The corporate press release doesn't reveal very much, and simply states:
This process is intended to facilitate Mr. Karmazin's personal financial planning strategy of asset diversification and liquidity.
Many investors have been thinking that if Liberty is aggressively buying Sirius XM stock at prices in excess of $2.50, it must be going higher. After all, Liberty's Chairman John Malone, who sits on the Sirius XM board, is a billionaire and if he is buying, than he must know that the stock is a bargain.
Now investors need to consider whether Karmazin's sales mean the opposite. Karmazin is the ultimate insider with more up-to date information than Malone and he has decided to start selling more of his equity. Peter Lynch, one of the most successful investors of the 20th century, once said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." So, let's take the press release at face value and this is merely a move to diversify. Mel still has another 30 million options that will vest at the end of the year, so it is not as though he will be out of the equity. In addition, according to the 2011 proxy statement, Karmazin also holds nearly nine million shares.
It's certainly not like he won't have any stake in the company. And with the possibility of tax increases on high-income individuals next year, maybe it's simply an effort to limit his tax liability exposure. But even if it is, it won't stop the speculation.
Here is something else in the press release:
Rule 10b5-1 allows corporate executives to adopt prearranged trading plans when they are not in possession of material, non-public information. ... The 10b5-1 rule allows individuals to gradually alter or diversify their portfolios while avoiding concerns that the transactions are occurring as a result of insider information.
I would have hoped that Liberty and Sirius XM were in discussions about the hostile takeover contemplated by Liberty. But if Karmazin is "not in possession of material, non-public information," then he and the non-Liberty Sirius XM board members must be just as much in the dark as retail investors concerning Liberty's plans and demands.
Two other points for investors to consider. Liberty's Malone and its CEO, Greg Maffei, have both openly discussed the desire to get their money back for the purchases needed to go from 40% to majority ownership. By Karmazin exercising options, the share count will increase by 30 million shares and Liberty will need to buy an additional 15 million shares. Liberty has also discussed the possibility of executing a Reverse Morris Trust ("RMT") to minimize tax liabilities. To do this, Liberty shareholders need to own a majority of Sirius XM shares.
So, if Liberty wants its money back and wants to maintain a majority, Sirius XM would most likely need to buy back those "10%" of Liberty's shares as well as an equal number of non-Liberty shares. Liberty executives have been stating that Sirius XM is underleveraged, and that the company can take on more debt. Sirius XM will certainly need to take on a lot of debt to buy back all the shares that these transactions would require.
None of this is to suggest that Karmazin is selling for any other reason than to diversify his holdings, but investors should recognize that his moves have consequences. One consequence of the announced planned sale by Karmazin is that it becomes slightly more costly and slightly more difficult for Liberty to get its money back and execute the RMT.
Last week, S&P issued a bulletin discussing its concerns about the potential new debt that Sirius XM might acquire under the direction of Liberty, even going so far as to suggest that it could warrant a downgrade. And, that is something that all investors should consider.