After Liberty's latest conference call, I was admittedly confused. I was waiting for the announcement of a SIRI + True Position spin-off and subsequent RMT. Instead, we got a spin off of all of their assets except Starz and a committment to stay in their Sirius investment for the medium term.
After reading a host of research reports and scouring through their conference call transcript I believe Liberty Media's plan is as follows:
1. Spin off LMCA leaving Starz as the "RemainCo"
2. Slowly claw up to 51% of SIRI
3. Begin to look to sell Starz. This could be a contentious point because of tax reasons. Due to Anti-Morris Trust Rules, if Liberty had discussions to sell Starz two years prior to the spin and sells it up to two years after the spin, there could be a tax bill to the spun entity. Liberty stated they have been careful to not trigger any of these tax treatments but out of conservatism, may wait 2 years. There is also a safe harbor provision that could move this no-shop period to 6 months. Regardless, I expect them to be slow as to a sale. Albrecht will be buying back shares if they trade at a discount and expanding their original programming lineup.
4. Once they achieve 51% at SIRI, LMCA will force them to start a buyback where Liberty can then sell back (pro-rata to maintain 51% ownership) to SIRI most or all of their "high-basis" shares (basically all shares purchased recently that will have gotten them from 40% ownership to 51% ownership).
5. Since they sold pro-rata and still have 51% ownership, Liberty can initiate an RMT at this time with SIRI (by initiating another spin of SIRI + True position leaving behind RemainCo 2)
6. RemainCo 2 will become what we have known historically as Liberty Capital and will have strong liquidity to do new deals from the proceeds of the SIRI buyback.
Liberty would rather have their high-basis shares bought back than put into an RMT because there is (not surprisingly) an upfront tax benefit.
Once I understood Liberty's plan, I had no choice but to applaud as their plan makes a lot of sense. Saving on taxes by initiating a buyback at SIRI (as well as hopefully improving share price by having a better capital structure) is what I should have expected by Liberty management. Currently trading at an approximate 22% discount per my calculations (using public securities at current market prices), Liberty has huge upside potential as they begin to execute on their plan and improve their NAV further.
Disclosure: I am long LMCA.