Karmazin Finishes One Sale, Starts Another

| About: Sirius XM (SIRI)
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According to a recently filed Form 4, Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin continued his preplanned conversion of stock options and sold another 20,362,700 shares of Sirius XM stock. These share sales were part of two previously announced 10b5-1 plans, and increase the number of common shares outstanding on both a basic and diluted basis. The sale also increases the number of shares Liberty Media (LMCA) needs to purchase to go over 50% ownership.

The actions occurred on Sept. 17, 18, and 19. The sale on the 17th was 3,462,700 shares and closed out the first 10b5-1 plan, bringing the total to 60 million shares. The sales on the 18th and 19th totaled 16.900,000 shares, with 13.1 million shares to be sold under the second 10b5-1 plan.

Increase in Basic and Diluted Share Count

When employees exercise incentive stock options, as Karmazin just did, new shares are issued. In Karmazin's case, like many other executives, the shares were immediately sold by the corporation. Sirius XM receives the money, keeps the portion of the cash received that represents the exercise price (in this case $0.43 per share), and distributes the rest to Karmazin, less any applicable taxes. Clearly, the act of issuing new shares increases the basic shares outstanding.

An investor might be more concerned about the diluted shares outstanding and whether this changes. The answer is that it does, but the impact is small. The reason lies in the Sirius XM 10-K describing the diluted shares.

Diluted net income (loss) per common share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt and preferred stock, warrants, stock options, restricted stock and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method.

The treasury stock method referenced above assumes that when in the money options are exercised, the company issues new shares, and then uses the proceeds from the exercise to repurchase shares. In this case, the amount received from the exercise is as follows:

20,362,700 shares x $0.43/share = $8,755,961

Assuming a $2.50 price per share (the treasury stock method uses the actual share prices during applicable reporting period), Sirius XM would be able to purchase the following:

$8,755,961 / $2.50 = 3,502,384 shares

The diluted shares attributable to these options being exercised would have been as follows:

20,362,700 - 3,502,384 = 16,860,316 shares

So, the GAAP diluted shares would have counted the hypothetical transaction as 16,860,316 shares. In the real world, Sirius XM is not using these proceeds to buy back shares and the diluted share count has just increased by 3.5 million shares.

With the number of shares outstanding at Sirius XM, 3.5 million shares do not appear to be all that significant. So far this year Karmazin has exercised, converted, and sold 76,900,000 shares. When one considers the price used in the treasury method calculation of diluted shares was less than the $2.50 in the above example, the total differential attributed to Karmazin's sales climbs well above 10 million shares for the year. Even the impact of an extra 10 million diluted shares is not particularly significant when one thinks in terms of almost 7 billion fully diluted shares at Sirius XM.

Impact on Liberty Media

From the standpoint of Liberty Media, the news should be expected, although the size of the initial sale under the second 10b5-1 plan may have been somewhat more than expected and could indicate the sale will be completed next month. Of more immediate impact is the necessity for Liberty to acquire an additional 10.2 million shares to get to majority at an expected cost of approximately $25 million. The dollar amount may seem large to some, until it is remembered that Liberty has already spent more than $1.3 billion.


It would appear that Karmazin's preplanned sales will conclude as early as next month. After that, Karmazin will still have 30 million options. These will not vest until Dec. 31. The sales will have not have a meaningful impact on earnings per share or Liberty's cost to acquire control of Sirius XM.

Disclosure: I am long SIRI. I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius at any time. 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.