Trade Update – $SIRI : Liberty is Getting Sirius

by CC January 6, 2014 10:22 am • Commentary

Back on Dec 24th we initiated a new long position in SIRI:

TRADE: Bought SIRI stock at $3.58

Here were Dan’s thoughts at the time:

what got me once again thinking about the stock is the enthusiasm about Pandora in the public market, sporting an almost $6 billion market cap with far fewer paid users (about 3 mil paid, 70 mil total) than SIRI, trading at almost 9x sales, and Spotify, which is private, but recently raised a bunch of cash placing a value on their 6 million paid users north of $4 billion.  SIRI by no means is a cheap stock with minimal earnings, but the company has grown sales at about 10% a year for the last few years and analyst expect them to continue to do so.

My sense is that SIRI could start to be viewed in a different light if some of these less established streaming upstarts continue to see their valuations expand in the new year.  Also, SIRI has long been considered a strategic asset (with 25 million paying subscribers) as one of the few outlets into in-car entertainment, I would have to assume that the company’s $22 billion market cap does not preclude it from being a potential take-over candidate from other large media properties or even a technology company such as as AAPL or AMZN could have multiple uses for such a service.

It looks like John Malone and Liberty Media feel pretty strongly about keeping SiriusXM in house as on Friday they announced:

Liberty Media Corp. unveiled a proposal to make satellite-radio provider Sirius XM Holdings Inc. a wholly owned subsidiary, a move that would give the media-investment company access to a new source of capital as it pursues a big cable merger.

The transaction would convert Sirius’s common stock into new Liberty Series C nonvoting shares. The proposed exchange ratio would value Sirius common stock at about $3.68 a share, a 3.1% premium based on the closing prices of the companies’ shares on Friday. Sirius shares were up 5% in aftermarket trading to $3.75.

Liberty currently owns about 52% of Sirius. Taking 100% ownership of the company would “eliminate ambiguity in the long-term relationship between Sirius and Liberty,” Greg Maffei, Liberty Media’s president and chief executive said during a conference call with analysts Friday. The deal would allow Sirius shareholders to convert from a noncontrolling stake in a subsidiary into a direct equity position in Liberty, he said.


Enis followed up our trade in SIRI with a deeper look into the stock and felt that:

The stock is probably cheap near $3 and fairly valued near $4

The stock is trading closer to that 4 dollar fair value number this morning at 3.84, higher than the 3.68 price named by Liberty. Here’s Joan Lappin from Gramercy Capital (a shareholder) on the deal:

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.

It is our sense that the stock is a decent hold a current levels as the action by Liberty is probably not the last we hear about this deal and most likely headlines from here on out would be about higher prices with little chance of lower.  If the stock were to get going though $4 we would possibly look to sell a longer dated call strike call because at some point it’s basically locking in a certain percentage in profits from the trade (assuming the deal keeps the stock above purchase price) as the premium of the call will go to zero once the deal is finalized.  Stay Tuned.