Tracking The Liberty Media Sirius XM Holdings Tracking Stock Discounts

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Crunching Numbers
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Summary

  • Liberty Media has three classes of Sirius tracking stocks.
  • Series A and Series C are highly liquid.
  • Series B are almost entirely owned by Liberty chairman John Malone and give him control of the company.
  • A simple formula has been developed to allow investors to determine the discounts of theses tracking stocks to the underlying assets.

This article is the latest update in a series of articles that focus on how to calculate the changing discount of Liberty Sirius XM Series A (LSXMA), Series B (LSXMB) and Series C (LSXMK) tracking stocks. These trackers were created by Liberty Media (FWONA, FWONK) several years ago in order to unlock the value of its assets in a variety of entities. At the time, Liberty owned the Atlanta Braves (for which another series of tracking stocks was created), a majority interest in Sirius XM Holdings (NASDAQ:SIRI), stakes in other publicly traded companies, with the largest being a position in Live Nation (LYV) and certain real estate interests. Since then, Liberty has also acquired Formula One along with certain debt instruments. The plan to eliminate the discount hasn't quite worked out as intended, with the Liberty Sirius XM tracking stocks continuing to trade at a significant discount to the Group's underlying assets.

It is important to note that each share of Liberty's three Sirius tracking stocks has the same economic interest in the holdings of the Liberty SiriusXM Group, but the voting interests of the shares in the different series vary widely. Each of the Series A shares have one vote, the Series C shares have 1/100 of a vote and are not eligible to vote on most matters. The Series B shares are owned almost entirely by Liberty's chairman, John Malone, and those shares - along with his Series A shares - give him nearly half the votes of the Liberty Sirius XM Group (and Malone's control is similar for the other Liberty tracking Groups, although those are not the subject of this article).

The size of the Liberty Sirius trackers' discount has changed over time. This is due to several factors. Some of the obvious ones include the Sirius XM Holdings common stock dividends being paid to Liberty, Liberty buying back shares of the trackers, Liberty taking on debt and buying other assets, Liberty issuing additional tracking shares as part of compensation packages, etc. There is also an overall discount that has varied over time based on the market's perception as to how quickly Liberty can reduce or eliminate the discount.

Below is a table showing the number of each class of the Sirius tracking shares outstanding and the change in the number of those shares from the prior quarter:

Liberty SiriusXM Shares Class:

Liberty SiriusXM Outstanding as of October 31, 2018

Liberty SiriusXM Outstanding as of January 31, 2019

No. of Shares Changed From Prior Quarter

Percentage Change From Prior Quarter

Series A

102,803,892

102,809,736

5,844

Less Than 0.1%

Series B

9,821,531

9,821,531

0

0%

Series C

214,981,984

210,823,353

(4,158,631)

1.93%

Total

327,607,407

323,454,620

(4,152,787)

1.27%

In the past, the reduction in Liberty SiriusXM shares outstanding would indicate that each share now represents a greater percentage of Sirius XM Holdings. And, since Sirius XM Holdings has been repurchasing its own shares, an investor would expect to see an even bigger impact than a 1.27% reduction would have indicated. However, Sirius completed the acquisition of Pandora Media after the close of the fourth quarter, and as a result, the Liberty Sirius Group's equity interest in Sirius XM Holdings has declined. According to the 2018 Liberty Media 10K:

As of December 31, 2018 our economic ownership interest in SIRIUS XM is approximately 73%. On February 1, 2019, SIRIUS XM issued shares of SIRIUS XM Common Stock in conjunction with its acquisition of Pandora Media, Inc. (“Pandora”), which reduced our economic ownership in SIRIUS XM to approximately 67% as of such date.

Regardless, we can still calculate a reasonably accurate per share value of each tracking share's economic interest in Sirius XM Holdings, as well as the value of other assets of Group. In order to do that, one can begin with the number of Sirius XM Holdings shares "owned" by the Group. We know that Liberty Media continues to own 3,162,173,996 shares of Sirius XM Holdings (if they had acquired or sold any Sirius XM Holdings shares, as an insider Liberty would have been required to quickly file an SEC document reporting such change).

Since each Liberty Sirius Group share has the same economic interest in the Group's assets, and since we know the number Sirius shares of common stock owned by the Group, we can see that each of the Liberty tracking shares is equivalent to:

3,162,173,996/323,454,620 = 9.7763 Sirius XM Holdings shares

Using the Sirius XM Holdings closing price of $5.76 on both Friday March 22nd and Monday March 25th, each Liberty Sirius tracking share would equate to:

$5.76 * 9.7763 = $56.31 for each Liberty Sirius Group share. On Friday, those tracking shares closed at:

  • Series A (or LSXMA) - $38.82
  • Series B (or LSXMB) - $39.63*
  • Series C (or LSXMK) - $39.02

On Monday, March 25th, the shares closed at:

  • Series A (or LSXMA) - $38.38
  • Series B (or LSXMB) - $39.63*
  • Series C (or LSXMK) - $38.52

* Closing price on Thursday March 21st, the last date the thinly traded B shares were traded.

Investors might expect to see the Liberty Sirius Group trade in the same direction and percentage moves as the underlying Sirius XM Holdings shares, but this is not always the case. On Friday the LSXMA and LSXMK shares lost 1.99% while the underlying Sirius XM Holdings shares lost nearly double that amount, or 3.68%. Regardless, the Friday prices of the LSXMA and LSXMK shares showed respective discounts of 31.06% and 30.71%. On Monday, despite Sirius XM Holdings shares closing unchanged, we saw both the LSXMA and LSXMK shares close down, and the respective discounts were slighter wider at 31.84% and 31.59%.

As noted previously, there are other assets and liabilities attributed to the group, along with a portion of the Liberty Media corporate expenses. These explain a small portion of the discount. For instance, the Liberty Q4 and full year earnings release noted that the Liberty Sirius Group held

$660 million in aggregate principal amount of iHeart bonds recorded at fair value

with that "fair value" recorded as $496 million and $444 million at the ends of Q3 and Q4, respectively. In addition, the report noted that the Group also had cash of $126 million and $91 million at the ends of Q3 and Q4 attributed to the Group, of which $46 million and $54 million of cash and liquid investments was held at SiriusXM at the end of those quarters. This means that there was a net of $80 million and $37 million in cash held directly by the Group.

On the expense and liability side, Liberty allocated $400 million of its 2.125% exchangeable senior debentures due 2048 and $600 million of its margin loans to the Sirius Group. It also allocated Liberty corporate level expenses of ~$10 million per quarter to the Sirius Group.

Lastly, since we know that Liberty holds 3,162,173,996 shares, and since Liberty current;y receives Sirius quarterly dividends at the rate of $0.0121 per share, it receives annual dividends of:

$0.0121 * 4 Quarters = $153,049,221.40

The $153 million in dividends are more than enough to pay the interest on both the $400 million of the 2.125% debt and the $600 million of margin loans, cover the corporate allocations of $40 million per year and still leave excess to continue LSXMA and LSXMK share repurchases.

Much less clear at this point is how to treat the iHeart debt. Last Friday an iHeart press release announced:

it is evaluating potential paths to achieve its listing following emergence from its restructuring process in the second quarter of this year.

As previously announced, pursuant to its Plan of Reorganization iHeartMedia is required to use reasonable best efforts to obtain listing of the Company’s Class A common stock on a recognized U.S. stock exchange following the completion of its restructuring process. Potential alternative paths to achieving that objective for the Company’s Class A common stock include a direct listing on a recognized U.S. stock exchange or an initial public offering. The company is currently in the process of evaluating all such potential paths.

Much of the iHeart debt will be wiped out as part of the restructuring, and it remains to be seen exactly how much of the new debt and the new equity will be part of the Liberty Sirius Group, and what the aggregate value of that position will be. For the purpose of this exercise, it is assumed that value will be the same as the $444 million reported at the end of 2018.

This $444 million and the $37 million in cash at year end will be offset by the $400 million of the 2.125% debt and the $600 million of margin loans, leaving a net negative amount of:

$444 million + $37 million - $400 million - $600 million = ($519 million)

And, on a per share basis, we get

($519 million) / 323,454,620 shares = ($1.60)/share

Thus, multiplying the current Sirius XM Holdings share price by the 9.7763 factor derived earlier, and subtracting the $1.60 constant calculated above, should allow an investor to quickly calculate the discount the Liberty Sirius Group shares trade at relative to the underlying assets held by the Group.

Outlook

In order to like the Liberty tracking stocks, one should be relatively positive on the underlying Sirius asset. And, since the start of the year, both FBN Securities and Morgan Stanley have been positive on the Series A tracker, with FBN making it a top pick. If Sirius XM Holdings does well, and Liberty achieves its goal of reducing the discount, the trackers would outperform Sirius XM Holdings.

As a straight long term investment. the current prices present a relatively attractive entry point for both the trackers and the underlying Sirius XM Holdings. However, I have never owned the trackers, and my own preference continues to utilize long term covered call options as part of an overall investing strategy for Sirius XM Holdings. I can't effectively use this strategy for the trackers, as only the LSXMA shares have options available, and they only go out to October of this year vs. 2021 expirations for Sirius XM Holdings. The shorter expirations on the LSXMA shares simply do not provide enough of a premium to offset the potential capping of my total return.

This article was written by

Crunching Numbers profile picture
3.05K Followers
As of May 13, 2022, ranked #95 out of 10,688 Bloggers (top 1%) by TipRanks and #392 out of 18,543 (top 2%) overall experts by TipRanks.com.https://www.tipranks.com/bloggers/crunching-numbersFocus is mostly on Sirius XM Holdings and income investing,  I have 30 years (through 2000) experience working for basic manufacturing and high tech industries in both the US and Europe. Company sizes ranged from start-ups to Fortune top 10. Experience as manager and/or grunt in fields of financial analysis, revenue forecasting, business planning, budgeting, pricing analysis, compensation planning, contracts, marketing and product management. Have been investing in stocks nearly 50 years, options for 30 years and on and off in real estate since 1981. Laid off when the dot-com bubble burst, and began investing full time.BS in engineering from Boston U, MBA in finance from Rutgers.
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Disclosure: I am/we are long SIRI, LYV. 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 regularly trade large blocks of SIRI and will write covered calls and LEAPs against my SIRI positions. Recent calls expired worthless and I may write new covered calls at any tine.

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