Buy Liberty Media Instead of Sirius
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've read several articles related to Liberty Media (NASDAQ: STRZA) and their recent filing attempting to take control of Sirius XM (NASDAQ: SIRI). What primarily interested me when I read about this, was the fact that investors sometimes are so enamored with the faster growing company being taken over that they forget to look at the potential value in the acquirer. This situation appears to be one that Peter Lynch would have favored. It seems investors could buy Liberty Media with their businesses and investments and get the growth of Sirius at a cheaper price.
The Potential Acquisition:
For those who don't know, Liberty Media already owns approximately 48% of Sirius outstanding shares. The company filed recently stating that it, “intends to purchase sufficient additional shares of Sirius common stock such that, upon conversion of its Preferred Shares, it will own more than 50% of the total outstanding shares of Sirius...” The company hopes to transfer control of Sirius to Liberty Media through this transaction. While the Federal Communications Commission would still have to approve this application, investors would be wise to consider Liberty Media as a way to acquire Sirius whether this application is approved or not.
Why Acquire Sirius?
I'm assuming of course that investors see potential in Sirius in the first place. The company recently reported earnings that showed continued progress in growing their subscriber base, and improving their financials. A recent article by The Motley Fool's own Rick Munarriz outlined the company's recent results. Sirius added an impressive 622,042 net subscribers and expects to close the year with nearly 1.6 million net new accounts. The company also expects revenue to approach $3.4 billion and free cash flow of about $700 million for the year. With nearly 23 million subscribers in North America, Sirius continues to gain as more vehicles are sold. In fact, the company signs about 45% of new vehicle owners to their service and showed a relatively low churn rate of just 1.9% in the most recent quarter.
While the company does face significant competition in the forms of Pandora (NYSE: P) and the private Spotify, both of these companies offer significantly less integration in vehicle entertainment systems, and neither company has the proven earnings of Sirius. Another huge difference between these three companies is, while Sirius produces original content and does not have to pay royalties for each song played, the other two companies incur costs with every song their customers listen to. While there's an argument that the Internet radio cost structure needs to be addressed compared to traditional terrestrial radio, until such changes are implemented, Pandora and Spotify will operate at a huge cost disadvantage.
So Why Liberty Media?
The number of assets that Liberty Media holds is the main reason I believe this company is a better play than buying Sirius directly. The company operates both the Starz and Encore brands, as well as the Atlanta Braves baseball team. The company has already stated its intent to spin off its pay television Starz unit into a separate company. According to the New York Times, this move is expected to “free up the cash Liberty needs to complete its purchase of Sirius shares.” What's interesting is that the value of Liberty Media seems low compared to their current holdings. Consider for a moment that they already own approximately 1.83 billion shares of Sirius, which represents about $4.7 billion. In addition, the company owns 26% of Live Nation (NYSE: LYV), which represents another roughly $430 million. The company also has significant investments in Time Warner, Viacom, and Barnes & Noble, which combined equal about $1.5 billion. Last but not least, the company holds a net cash position of about $1.3 billion. If you add all of this up, the total is just less than $8 billion, compared to Liberty Media's total market cap of roughly $12 billion.
In essence, investors are buying Liberty's other businesses for roughly $4 billion. While the valuation of the Atlanta Braves is somewhat difficult to determine, we can use the recent sales of the Padres for $800 million, and the sale of the Dodgers for $2 billion as a good proxy. Stripping away Liberty Media's investments, cash, and the potential value of their baseball team, investors are buying the Starz business for very little. If Liberty Media is successful in taking over Sirius, the company's overall growth rate should speed up from the higher contribution of Sirius. Considering that both companies sell for similar forward P/E ratios, it seems clear that investors should buy Liberty Media instead of Sirius.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.