Liberty Media revised its relationship with controlled subsidiary Sirius XM as 2014 began by announcing its goal to acquire the shares in the satellite radio provider it doesn’t already own. The non-binding offer is to pay a tiny premium to the closing price of Sirius when the offer was made of about $3.68 per share. The complicated offer, Liberty wouldn’t know how to do anything else, is for Sirius XM holders to be paid 0.076 shares of a new Liberty Common Class C stock. Existing Liberty shareholders would be paid class C shares in a ratio of 2:1 and Sirius holders would end up owning 39% of the newly merged entity. There is some humor in that because Liberty bought 40% of Sirius for a mere $530 million loan six years ago.
Sirius was then selling for pennies after former CEO Mel Karmazin and still ( for mysterious reasons to me) CFO David Frear made a terrible call on financing for Sirius when it was available. They didn’t like the price of the debt offered and turned it down. Then the world collapsed and they couldn’t get any money at any price. In the aftermath of the Liberty offer, the stock has rebounded 1000% and both Karmazin and Frears pocketed tens of millions in a huge payback for their gross error. Liberty has also enjoyed what is probably its best investment of all time.
The original deal included a three year stand still agreement. Once that deadline passed, Liberty began accumulating more shares and even using Sirius’ cash flow to shrink the share base as a way to expand its percentage ownership. Now it wants to own the entire company.
Sirius has moved to a more mature mode and generates significant cash flows. Since Liberty is in a full court press to use its Charter Communications holdings to try to acquire Time Warner Cable, that cash flow is more valuable than ever. By buying Sirius XM for shares, the transaction is non-taxable. Liberty is always run for tax efficiency. In addition to being able to fully utilize that delicious cash flow as it seeks funding for further acquisitions, Sirius also has several billions in net loss carry forwards that are also worth a fortune to a combined Liberty entity.
In part due to the law of large numbers, Sirius is experiencing much lower growth rates in recent years and that trend is likely to continue. It has never been able in recent years to break above 50% of new cars sold in its new customer acquisitions. Twice as many used cars as new cars are sold in the United States and Sirius has talked forever about doing better in attracting second owners into the fold. Even so, it hasn’t really succeeded. Sirius does better when car sales are booming as they have been lately and not so well when car sales slacken. Over the years, the cost of radios installed in new vehicles has fallen dramatically and in turn reducing the cost per net adds of new subscribers. The satellite fleet has been replenished. Sirius has also recently acquired Agero for $530 million, coincidentally the same amount Liberty lent it years ago. Agero bills itself on its website as a leader in telematics, surely a growing business that Sirius could offer through its existing satellite system.
In a description that exactly matches the model used when Sprint abused Clearwire shareholders earlier this year, Sirius XM will form a special committee of supposedly “independent” directors to evaluate and negotiate the offer. One presumes Liberty has begun with a low ball price so it has room to raise its offer. Sirius was selling considerably higher a few months ago having traded as high as $4.18. There have been price targets published in the $5 range in recent months. So the price offered seems quite low. In the Clearwire case, the independent directors didn’t act very independent but hedge fund holders were able to drive a price that 60% higher than the opening bid for Sprint to be able to acquire those assets, principally 2.5 Ghz spectrum without which Sprint had no future.
Remember that after Karmazin and Howard Stern joined Sirius years ago, the stock traded at prices more than twice this offer. It should also be noted that the offer is non binding which means that if the price changes dramatically, it could be withdrawn at any time. In the conference call announcing the offer, an analyst asked if in the future Sirius XM might be spun out again. That is a pattern typical of John Malone and Greg Maffei as they constantly groom their portfolio of assets at Liberty.
Joan E. Lappin CFA Gramercy Capital Mgt. Corp.
Mrs. Lappin, Gramercy Capital and its clients own shares in Sirius XM and Sprint at this time. For information about Gramercy Capital: email@example.com To follow Mrs. Lappin on Forbes.com click on the button at the top of this article. To follow Joan on Twitter: @joanlappin
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