There have been a lot of comments and articles on Seeking Alpha about whether or not Liberty Media (NASDAQ:LMCA) will drive the price of Sirius XM Radio (NASDAQ:SIRI) lower. Many of the comments position Liberty as a stock price manipulator whose intent is to drive the Sirius XM share price lower in order to reduce the price it must pay to acquire control of Sirius XM. Discussions ensue about the benefits and disadvantages of such a strategy. It is far from the simple issue that many try to portray.
Liberty is Paying Nearly $1.4 Billion to Acquire 611 Million Shares
Liberty is spending a lot of money to acquire control of Sirius XM. The market purchases and the forward contracts will bring Liberty's ownership percentage to more than 49% and cost nearly $1.4 billion plus fees. Those shares will cost more than $2.25 each, so why would Liberty jeopardize that investment?
Liberty's Market Cap Is Tied To Sirius XM Share Price
One side will argue that Liberty's 3.2 billion shares of Sirius XM represents nearly two thirds of Liberty's market cap of more than $12 billion. With so much of Liberty's value tied to the price of Sirius XM stock, why would Liberty do anything to reduce that value? The other side might counter that Liberty's market cap undervalues its assets and the break-up value of Liberty is significantly greater than $12 billion. It is a weak counter-argument. Even if Sirius XM represented only 50% or 40% of Liberty's market cap, it would not seem to make any sense to drive down the value.
Liberty Wants a Lower Share Price to Make a Share Buyback Less Expensive
This argument would seem to make sense, but it suggests that Liberty has the capability to manipulate the share price. If that were the case, how does it explain that Liberty's first forward contract was entered into December of 2011 when the share price was no higher than $1.83 and Liberty was only able to acquire the first 302 million shares at an average price of $2.15? If Liberty could manipulate the price then, why not go for the full 700 million shares needed at a price of $2.15 or less?
Or, how does it explain market purchases by Liberty at prices ranging from $2.14 to $2.52? Or a second forward contract at $2.05 per share? It doesn't, and is probably a solid indication that Liberty either can't or has chosen not to manipulate the price for its own benefit.
Can Liberty Drive the Sirius XM Share Price in Either Direction?
Liberty might very well take actions that drive the price higher orlower. Arguably, Liberty purchasing more than 600 million shares Sirius XM's 3.8 billion common shares outstanding - or 16% - has driven the price of Sirius XM shares higher. Not only has its buying binge increased demand for the shares over the past nine months, but those shares have been removed from the market.
In classic economic terms, Liberty has simultaneously provided an increase in demand and a decrease in supply. Of course it could be argued that by driving up the price, Liberty's buying has helped reduce demand from other potential share purchasers.
So, what happens if Liberty stops buying? Will the share price fall? Perhaps, but take it one step further. One option discussed by Liberty management regarding its investment in Sirius XM was to spin the shares to Liberty shareholders in a transaction known as a Reverse Morris Trust or RMT. If Liberty's buying was to get it in a position to become a majority owner, set up a RMT and distribute the shares to Liberty shareholders tax free, then an investor may want to consider what Liberty shareholders will do once they receive their Sirius XM shares. Isn't it reasonable to think that some of these new owners of Sirius XM will sell? And, if they do sell, will there be a new buyer to take Liberty's place?
In addition, if Liberty goes to a majority ownership position, it triggers a change of control covenant and bonus provision in the Sirius XM 7% Exchangeable Notes. If these notes are converted to shares, there will an increase of 0.3 billion shares of common stock. The holders of these shares were bond investors and may even be less interested in holding onto the stock than the Liberty shareholders described in the previous paragraph.
To be clear, I do not think that Liberty will attempt to drive the price of the Sirius XM shares lower, even if they had that capability. It makes more sense that Liberty wants the price as high as possible because:
- Liberty management has expressed an interest in getting back the $1.4 billion it has spent on Sirius XM shares this year andstated a reluctance to spin "full basis" shares.
- To execute the RMT and take advantage of the tax benefit, Liberty shareholders need to hold a majority ownership in Sirius XM both before and after the spin and merger.
- After the spin, Liberty will be a much smaller company. To remain relevant, it will be important for Liberty to have significant cash for future investments.
Despite a desire to have the share price of Sirius XM high, the very actions required by Liberty to execute the RMT would seem likely to set off a chain of events that would result in pricing pressure on the Sirius XM shares. This chain would involve both the conversion of the 7% Note, and the conversion of the remainder of Liberty's Sirius XM preferred shares to Sirius XM common shares and distributing those common shares to Liberty shareholders followed by some holders choosing to sell.
In the same manner that Liberty's purchases throughout the year are likely to have contributed to the Sirius XM share price appreciation, its future goals and objectives could drive the price of Sirius XM lower.
Some are concerned that Liberty will break the law. They are worried about conspiracies, private back room deals and stock manipulators taking advantage of the small investor. They should probably be more concerned about the law of supply and demand.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 and $2.50 December covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.