Liberty Launches Assault on Sirius XM Shareholders
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Satellite radio Sirius XM (NASDAQ: SIRI) is on a short list of the most polarizing stocks on the market, as it has developed somewhat of a love-hate relationship with investors and analysts. Remarkably, even from its supporters or doubters, it remains one of the most misunderstood companies on Wall Street.
As a longtime subscriber of the service, I can tell you that there is a considerable amount of value in what Sirius offers. However, as an investor, trying to find the value in the stock is a tricky proposition – particularly now, as it is under attack from many angles by Liberty Media (NASDAQ: STRZA). But things have gotten a little bit nastier, and it is investors that stand to lose.
Since hitting an intra-day low of $1.80 on June 25, there has not been many stocks that have performed better than Sirius. If you factor in its recent high of $2.64, the stock has appreciated almost 50% over the past 3 months. Except now we know why: Liberty has been on a buying spree as it aimed to take control of the company.
That, along with what I would consider a significant amount of short covering, has propelled the stock to heights that it has not seen since it pre-merger days. But it now appears that Sirius is poised to give up these gains. And Liberty has every intention of facilitating the fall.
Liberty once said that it would not convert its preferred shares of Sirius to common stock. However, we learned recently that it in fact converted 50% of these shares. While I don’t want to be naïve and suggest that somehow, "Liberty’s hand was forced," it likely didn’t anticipate that Sirius would be playing so hard to get, either. This has been a part of Liberty’s plan and a card that it was prepared to play at the right opportunity. In a recent SEC filing, the company said as a result of the conversion, its stake in the Sirius has risen to 49.5%, while also owning roughly 32% of common shares. So what does this all mean?
What it means is that any further delay in this dance between the two companies is nothing more than postponing the inevitable. Sirius is now at the mercy of Liberty and what it wants to do - it’s all just a matter of time. What’s more the impact of Liberty’s conversion has caused a considerable amount of confusion with Sirius’ financial metrics. One day we woke up to Sirius having a P/E of 4; then, upon the conversion, various sources listed the P/E at 32. Not that Sirius has ever traded on fundamentals, but to the extent that investors might consider such factors within their investment/trading decisions, it becomes pretty significant.
So how much is Sirius really worth? What is its market cap? How much does it now earn per share? Will this force analysts to revise or restate projections. It is hard to answer these important questions after Liberty has essentially flooded the market with 1 billion extra shares – essentially causing massive dilution. While Liberty has recently helped many investors by buying shares of Sirius on the open market, it has now announced that its holiday shopping season is ending early and now it’s time to return unwanted gifs.
For many investors, the logic has always been, “if Liberty wants Sirius so bad, then they are going to have to pay a premium for it.” I can only ask, really? I’m curious to see if investors now still feel that same way. Liberty is operating by its own set of rules and its own timetable. That Liberty is also an investor in Sirius does not mean that it cares about the stock appreciating in value more than the other benefits Sirius offers such as its $8 billion in NOLs as well as assets that Liberty is able to leverage for gains in other areas of its holdings.
I’m not going to sit here and pretend to know where the stock is heading – nobody really knows. Nonetheless, the most important question to now ask is not whether or not the stock will go up or down, but are investors prepared to make the important decisions based on these current facts. One of which is the likelihood that Liberty’s free lunch to investors is over. Without Liberty artificially propping up the stock, what is now left to support it from further declines? Not a whole lot. As noted, the stock has surged almost 50% since hitting $1.80 in June. The only possible scenario left to unfold is a correction. If so, to what degree? Are you going to be a holder and find out?
Bottom line
As I've said recently, Sirius the company has been performing as well as anyone can expect and for this it deserves a considerable amount of credit for what it has been able to accomplish in a challenging economy. However, on Wall Street where there are often many more variables impacting stock prices other than performance, investors need to keep a watchful eye on what is certain to unfold over the next couple of weeks.
Since it is possible that the stock might now be in the midst of a downtrend, it might be time for investors to consider seeking shelter elsewhere until the situation with Liberty becomes clearer. It’s a shame. As well as Sirius has performed so far this year, it deserves better. Unfortunately, it no longer controls its own destiny.
Interested in additional analysis?
Despite being one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for Sirius XM -- and plenty of room to fall if things don't. Read all about Sirius in The Motley Fool’s brand new premium report. To get started, just click here now.
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