If you like Mel Karmazin, that may be good news.
I don't tend to extend outside of my own comfort zone when it comes to making predictions, but the issue of whether Mel Karmazin will stay or go as CEO of Sirius XM (SIRI) is hot on the minds of investors. I've given this a good amount of thought and would like to share my thought process and prediction here leading into Sirius XM's Q3 conference call on October 30th.
With the run Sirius XM has been having over the past few months, from the $1.80's in June to a new high of $2.97 on Thursday, the street has been buzzing with questions asking why. As I touched upon in a previous article linked above, I believe much of the run Sirius XM has been having can be attributed to some big players entering the game. "Smart money" or institutional buying, in my opinion, has been heavy with the expectation that share buybacks will start soon returning capital to share holders.
That's important point number one to take into account. Sirius XM CEO Mel Karmazin has stated many times that the company would like to find a way to return capital to share holders. While buy backs have often been mentioned as one possible route, Karmazin has been reluctant to do so without Liberty Media's (LMCA) participation. Had these buybacks started before Liberty moved to its current stake of 49.6%, share buybacks would have increased Liberty's stake without its participation. Until recently, Liberty has said it would not participate in a share buy back.
That has all changed, and at the most recent Liberty investor meeting it was stated that Liberty would cooperate with a Sirius XM share buyback plan, effectively selling back shares on a one to one basis to maintain its 49.6% stake. That's point number two to remember, and this is a crucial change that leads me to believe that Sirius XM's Q3 call may contain details of a pending share buyback starting very soon.
For the same reasons I have suggested investors buy "sooner rather than later" and for the same reasons I have suggested shorts cover "sooner rather than later" I expect Sirius XM will want to start share buybacks "sooner rather than later." With Liberty's cooperation, the ball can get rolling as soon as possible, and there's little reason for delay. Why? Because Sirius XM is performing well. That may be simplified but there's no need to overcomplicate with a bunch of numbers and figures. 2013 guidance is just around the corner and there is little reason to expect that things will be different, and this means as time passes, Sirius XM should appreciate with the constant addition of subscribers driving revenue. Investors (and that includes Liberty) stand to gain the most from buybacks at the lower prices today rather than what is expected to be higher pricing in the future.
Remember, we're looking at the issue of control here, so point number three to consider is this. Mel Karmazin has stated in the past that he does not like working for someone else or playing "second fiddle." Mel likes to be in charge. I can certainly relate to that. Heads of Liberty Media have stated that they "like Mel" and in their most recent investor meeting made statements that seem to point to them not wishing to butt heads with Mel on certain issues.
Point four, Liberty is waiting for word from the FCC that it can take control of the spectrum licenses at Sirius XM. What investors need to keep in mind is that this is a request for permission. If permission is granted, unless it is stipulated that they must, there is nothing saying Liberty has to go to a controlling stake within a certain time frame. This is very important. There is no real benefit to Liberty going to control unless control of Sirius XM is necessary to force certain things to happen such as a share buy back. There are actually negative issues for Liberty if it goes to control before it must such as the change of control clause tucked away in the outstanding convertible bonds. Liberty wants permission, it doesn't necessarily want the actual control just yet.
Tying it all together we have the following :
- Share buybacks are soon to be on the table.
- Liberty has now said it will participate in the buybacks retaining its current 49.6% position.
- Mel Karmazin would like to remain in control.
- Assuming share buybacks start soon, there is no benefit to Liberty to go to a controlling stake to force it, and there are draw backs to going to control before Liberty is required to do so.
What does this mean? Mel can stay in control and his contract can be renewed or extended, assuming that Liberty is happy with his performance and compensation can be agreed upon. While Liberty does not have the full say in this without going to over 50%, their control of Mel's future contract is implied at 49.6%.
And I think that is exactly what will happen. Mel will be staying, and this will be announced in conjunction with the share buyback plan Liberty needs to recoup its recent investment of capital over the course of the next one to two years. I do not expect Liberty to increase its stake beyond 50% unless it is required to by the FCC, and I expect that Mel's new contract would include provisions for this which would keep him in a controlling position with Sirius XM if this were to happen.
Am I stepping out of my league on this one? Perhaps. I do concede that this may just be wild speculation but I don't think anyone can claim that Mel Karmazin staying or going, and the conditions around it, are anything other than "anyone's guess." I should be proven right or wrong on October 30th, and I will go on record as saying Mel Karmazin staying would be well received by the street, and especially well received by the larger institutional position investing in Sirius XM.
That would be a very good thing for Sirius XM share holders.