Liberty SiriusXM (NASDAQ:LSXMA) (LSKMB) (NASDAQ:LSXMK) investors are made up primarily of shareholders of Liberty Media. The newly minted tracking stocks for Liberty Media's (LMCA) (NASDAQ:LMCB) (LMCK) (62% stake in SiriusXM (NASDAQ:SIRI) began trading this week. The stock opened at $28 and is now trading at over $32. This is a new method for many investors to gain exposure to satellite radio, but the question of whether these trackers or SiriusXM is a better play depends on strategy, assumptions, and of course, the market.
Readers should bear in mind that what I will present in this article is an assessment from the perspective of Liberty SiriusXM shareholders. I will cover the perspective from SiriusXM shareholders in a separate article.
Current SiriusXM trades at about $3.83 and carries a market cap of $19.6 billion dollars. Using very simple math, if we apply the Liberty Media 62% stake to that market cap we get a "real value" of the Liberty stake. There are a few other considerations like cash and debt attributable to the Liberty stake, but in the guise of keeping things simple, I will simply stick to market capitalization.
The Liberty Media shares carry a real value of about $12.2 billion. Now let's assess the market cap of the tracker. LSXMA trades at a market cap of $10.9 billion. This makes the delta between the real value and the tracker value $1.3 billion. Essentially the tracker is trading at about an 11% discount to the underlying equity.
The purpose of creating trackers was to unlock value. In my opinion there would be more unlocked value if there was only one class of shares, but that is another discussion. Trackers oft trade at a discount because rather than ownership of a stake in a company you own assignment rights.
For Liberty SiriusXM investors the very basic question is how to capture that $1.3 billion. There are various ways to accomplish this and they offer different benefits. One oft discussed and oversimplified mechanism is simply to buy out SiriusXM and get the company under one roof as a part of the Liberty conglomerate. Liberty is far more complex than that.
The first thing to consider is whether it is best to buy out SiriusXM or to do a hard spin and consolidate as a stand alone entity. What determines the better path for Liberty Media and its shareholders is the valuation gap between the underlying equity (SiriusXM) and the tracker (Liberty SiriusXM).
If the tracker is trading at a 5% discount or less, a buyout of SiriusXM shareholders makes sense. This is what transpired when Liberty made a buyout offer in 2014. At that time Liberty Media stock was trading at about a 1% discount. Thus, paying a small premium to SiriusXM shareholders made financial sense. The unlocked value in getting SirusXM bought out would, in concept, outweigh the small premium paid.
If the tracker is trading above a 5% discount another strategy comes into play. That strategy is a hard spin. In that situation, Liberty SiriusXM would merge with SiriusXM with SiriusXM as the surviving entity and as a standalone company. In this type of situation it is common for the premium to go to the majority holder. In this case the premium would go to Liberty SiriusXM shareholders. One way that premium can be achieved is to build it into the ownership percentage. In this case, Liberty currently owns 62% of SiriusXM. Such a deal may be that Liberty would own 65% of the company once the hard spin is complete.
In the past I have used the term buyout rather loosely as a way to describe the exercise of getting all of SiriusXM under one roof. In my opinion the critical aspect of these companies is that getting all of the company in one place is critical.
Investors in Liberty SiriusXM should understand one critical point. John Malone controls enough stock to vote matters in pretty much any way he pleases at any time he pleases. This means that when Liberty decides to make a move, it will pass the voting process.
This article is intended to give a bit of guidance on why certain strategies may apply and why it is actually possible to see this fresh new tracking stock spun at some point in the near future. Liberty created the spin to unlock value. That is beginning to happen. Earlier in the week the delta between LSXMA and SIRI was $1.7 billion. Those that got into LSXMA early enough have already seen some value unlock. After all, the stock has gone from $28 per share to $32 in a couple of days. There is still potential to see it unlock further, even as a tracker. At some point an equilibrium will happen and we will be able to assess the "natural" discount. The level of that discount will come into play with the strategy of consolidating Liberty SiriusXM and SiriusXM.
The bottom line is that the trackers were created to narrow the discount. There is over $1 billion in hidden value in this tracker now. That is a lot of money sitting on the table. A move to tap into that $1 billion in value will happen at some point in the not to distant future. There will be times when the Liberty SiriusXM tracker presents the best value, and times when the underlying SiriusXM stock presents the best value. Do not get worked up about which way the premium goes. That is simply a function of the relative discount at the time an offer is done. The most value gets unlocked with the company under one roof. In my opinion even more value is unlocked if it is a stand-alone company and not a part of a conglomerate. Still more value would be unlocked with a more simple stock structure that has just one class of shares.
There are a lot of moving parts, but that is the Liberty Media way. In my opinion it is better to understand this now and potentially trade on the moves than to be confused when all of the action starts. Stay Tuned!
Disclosure: I am/we are long LMCA, LSXMA, LSXMK, 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.