This article may seem familiar to those that have been following my previous articles on how to calculate the changing discounts of Liberty SiriusXM 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 SiriusXM Group tracking stocks continuing to trade at a significant discount to the Group's underlying assets.
The focus of the series has always been the Liberty Sirius Group for several reasons. I hold and actively trade shares of Sirius XM Holdings and have often written covered calls against the long positions. The assets of the Group are overwhelmingly comprised of the publicly-traded Sirius XM Holdings common stock, thereby giving us a market price for that asset. As to the other two Groups... as a NY Mets fan that had to watch the Braves win 11 straight National League East titles from 1995 to 2005, I can't imagine "owning" the team. And, the last Group has a mix of assets, many of which are quite difficult to quantify.
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 has one vote and each of the Series C shares has 1/100 of a vote and are not eligible to vote on most matters. The Series B shares each have 10 votes and are owned almost entirely by Liberty's chairman, John Malone. Those Series B shares - along with his Series A shares - give him nearly half the votes of the Liberty SiriusXM Group. (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.
Liberty Sirius shareholders had seen their percentage ownership of Sirius XM Holdings increase ever since the trackers were distributed. This was due to Sirius XM Holdings aggressively repurchasing shares as the company authorized one $2 billion buyback after another. During Q1 there was a significant event at Sirius XM Holdings - the acquisition of Pandora Media. The all-stock transaction required that Sirius issue hundreds of millions of new shares of Sirius for the outstanding shares of Pandora. While the increase in Sirius shares outstanding during Q1 resulted in a decline in the percentage ownership of Sirius XM Holdings by the Liberty SiriusXM Group, it had no impact on the number of Sirius XM Holdings "allocated" to each tracking share.
Below is a table showing the number of each class of Liberty Media Corporation's SiriusXM tracking shares outstanding as of April 30, 2019, as well as the change in the number of those shares from the prior quarter:
Liberty SiriusXM Shares Class:
Liberty SiriusXM Outstanding as of January 31, 2019
Liberty SiriusXM Outstanding as of April 30, 2019
No. of Shares Changed From Prior Quarter
Percentage Change From Prior Quarter
Table created by Crunching Numbers from data in the Liberty Media 2018 10K and its first quarter 2019 10Q
The above table shows that there was a small increase in the Series A shares (most likely from some form of share-based compensation), no change in the Series B shares, and a decline of 1.82% in the Series C shares, for a total decline of 1.17% of the Group shares. Also, as noted in the previous articles, the Liberty Sirius Group continues to hold 3,162,173,996 shares of Sirius XM Holdings (if it 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 Sirius XM Holdings Shares / 319,677,000 Liberty Sirius Shares
= 9.8918 shares of Sirius XM Holdings.
Due to the reduction in the number of Liberty Sirius shares outstanding, the number of SiriusXM shares per Liberty Sirius share has increased from the 9.7763 (or 1.18%) calculated as of January 31, 2019. This represents the vast majority of the intrinsic value of the tracking shares. There are, however, a few additional figures that need to be taken into account, including the assets and liabilities assigned to the group. According to the 10-Q, as of March 31, 2019 these included:
Or, a net of $456 million - $400 million - $800 million + $36 million = ($708 million)
If we allocate this negative $708 million equally to each of the 319,677,000 Liberty Sirius shares, we get a negative $2.21/share. We can now see that the value of each Liberty Sirius tracking share should equal:
(9.8918 x current Sirius XM Holdings share price) - $2.21.
On Thursday, June 13th, the Sirius XM Holdings shares closed at $5.58, and plugging that value into the above formula gives us:
(9.8918 x $5.58) - $2.21 = $55.20 - $2.21 = $52.99
On Thursday June 13th, the Liberty Sirius tracking shares closed at:
This would indicate that the above tracking stock implied discounts are:
It should be noted that the Series B shares are very thinly traded, and there would be market inefficiencies. Over the past three days, there were just 273, 243, and 165 shares traded, and for the three days prior to that, there were zero shares traded each day. Somewhat surprising is the Series A shares having slightly lower prices than the Series C shares, despite the fact that the Series A shares have one vote while the Series C shares cannot vote on most matters.
And, while the price difference between the A and C shares is small, the C shares have closed higher each of the past five sessions.
On the expense side, Liberty allocated 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 currently 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 funds to continue LSXMA and LSXMK share repurchases.
In order to like the Liberty tracking stocks, one should be relatively positive on the underlying Sirius asset. According to Seeking Alpha, 17 sell-side analysts have an average rating of 3.76 (out of 5), or Outperform. At the current price, I find the Sirius XM Holdings stock attractive. More importantly, if Malone can find a way to reduce the discount from the current 30% level, the trackers should do significantly better than the underlying Sirius asset. If Sirius XM Holdings does well, and Liberty achieves its goal of reducing the discount, the trackers would outperform Sirius XM Holdings.
This article was written by
Disclosure: I am/we are long LYV, 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: Other than SIRI and LYV, I don't own shares in any of the other companies mentioned in the article. I regularly trade large blocks of SIRI (5,000-10,000 shares) and will continue to do so at any time. I have no plans to buy or sell shares of any other companies mentioned in the article. 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 January of 2020 vs. the January of 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.