Liberty Stake Could Be Bad For Sirius Investors

| About: Sirius XM (SIRI)
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Are things looking up for satellite radio provider Sirius XM Radio (NASDAQ:SIRI) after Liberty Media (LMCA) made more moves to takeover the company? While this may be great for Liberty Media investors, it could spell doom for those of Sirius.

The latest moves, made in mid-May, would specifically increase Liberty Media's stake in Sirius XM to 45.2%. It announced at the time of the release of its second-quarter fiscal 2012 earnings that it had entered into a forward purchase contract for 302 million shares of Sirius XM with a forward price of $2.15 per share. The cost is $650 million. The transaction is set to close in the third quarter of fiscal 2012.

To get an idea of the impact, if any, the $2.15 a share price may have, let's look at Sirius XM's trading price at the time of Liberty Media's latest move. At that time, in mid-May, Sirius XM was trading at $2. That was within its 52-week trading range of $1.27 and $2.44. It should also be noted that the $2 reflected a 5% decrease for that day's session. So, the news of Liberty Media's intent did not bode well at all for Sirius XM, and I think that directly reflects investor sentiment that it is time to bail on Sirius XM.

I have heard naysayers say that Sirius XM shareholders should be leery about Liberty Media's moves to increase the number of shares it owns in Sirius XM. The concern is that Liberty Media seems to be saying that Sirius XM is not worth any more than $2.15 a share. While this may be the price Liberty Media will limit itself in paying, I stop short of saying that the stock could not move higher than that.

When satellite radio debuted more than a decade ago, it was wildly popular and successful. The idea of doing away with the traditional car radio and the constant commercials played instead of music was enough to push me to install Sirius XM in my car. I loved the music selection and the fact that it was easy to use made Sirius XM a product that I highly recommended.

Then came MP3 players and the growth of free Internet radio services like Pandora (NYSE:P). Things became so dire for Sirius XM a few years ago that it flirted with bankruptcy. However, it has gotten its finances in order and that is reflected in its most recent earnings report.

Competition is proving to be fierce, but Sirius XM is managing to hold its own. This is reflected in the company's most recent earnings report.

In early May, the company reported that revenue for the first quarter of fiscal 2012 was up 11% to $805 million. Net income for the first quarters of 2012 and 2011 was $108 million and $78 million, respectively, or $0.02 and $0.01 per diluted share, respectively.

I think one of the most noteworthy indicators of the company's strength is the improvement in its monthly churn rate. The company reported that during the first quarter, it grew subscribers faster than any first quarter since its 2008 merger with XM. Also, it was able to improve its churn rate despite a price increase that was implemented at the beginning of the year. The rate improved from 2% in the first quarter of 2011 to 1.9% in the first quarter of 2012.

Sirius XM was affected by the recession, but it was not directly due to a drop in subscribers. The company began to significantly grow its business through partnerships with car manufacturers like General Motors (NYSE:GM). However, when the economy tanked, fewer people bought vehicles, directly impacting Sirius XM's bottom line.

Vehicle sales have picked up, and the company is banking on this leading to an uptick in its subscriber base. In fact, the company says this should enable it to exceed its prior 2012 subscriber growth guidance of 1.3 million, so it raised it to 1.5 million.

The company's free cash flow growth is also noteworthy. It improved from negative $17 million in the first quarter of 2011 to $15 million in the first quarter of 2012. In fact, Sirius XM says this is the first time the company has shown positive free cash flow in the first quarter of a year.

Although it faces competition from free Internet radio services like Pandora, Sirius XM's ability to maintain and increase its subscriber base show it can handle the competition. It also shows why Liberty Media is eager to control it. Liberty is Sirius XM's largest shareholder.

Liberty Media went the route of buying more shares in Sirius XM after the Federal Communications Commission rejected its request to take control of the satellite radio company based on the 40% of common stock it already owns. Specifically, Liberty Media asked to be declared in "de facto control" of Sirius XM. Liberty Media needed to convert its preferred shares into common stock in Sirius XM.

Around the same time that Sirius XM released its earnings, so did Liberty Media. Its revenue was down 55% to $440 million in the first quarter. The company blamed the decrease on a "significant recognition of deferred revenue" and costs in the previous year related to one of its subsidiaries.

Among its high points are increases in subscriptions to Starz and Encore. Liberty Media reported that the number of subscribers to Starz hit an all-time high of 20.1 million subscribers and Encore had 33.6 million. That represents an increase of 7% and 2%, respectively, compared with the same period in fiscal 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.