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Sirius XM and The Statutes of Liberty

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Warren Buffett once said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Considering how well-run Sirius XM (NASDAQ: SIRI) has operated over the past couple of years, suffice it to say, investors have gotten a steal. But for how long?

One can’t discuss Sirius XM’s future without projecting how it will be impacted from decisions made by Liberty Media (NASDAQ: STRZA), or its “statutes.” In exchange for a $530 million loan, Liberty was given a 40% stake in the company several years ago. Since then, Liberty has been scooping up Sirius shares at market prices – growing its position to 49.77%.

Essentially, Liberty has been meticulously executing and waiting patiently for the news received Thursday by the FCC. The company is now one step closer to seizing full control of Sirius. In a recent filing, Liberty said within 60 days of gaining approval, it will move to acquire more than the 50% of Sirius’s common stock it needs to finally command the cash machine that is Sirius. But what does it mean for investors?

Reverse Morris Trust – For Liberty Shareholders

A Reverse Morris Trust (RMT) is the most popular speculated upon option for Liberty Media. But it’s more than just speculation at this point. The company’s Chairman, John Malone pretty much guaranteed it several months ago stating:

  • “If I’m in control, I like to have separate companies, run independently, with public shareholders investing in that business. There is no question eventually Sirius will be an independent company. The question is, in what time frame and in what circumstances?”

The company’s goal is to execute a spin-off (RMT) of Sirius, which allows Sirius to remain a separate entity under Liberty’s ownership. This also allows shareholders the option to buy, hold or divest their positions in Sirius. This is how Liberty has operated with other holdings, which includes Liberty Global and DirecTV.

However, an RMT is more than just an operating option between two separate entities; there are tax advantages as well - particularly in the form of cap gains savings. For instance, in lieu of selling Sirius shares on the open market, acquiring Sirius shares via a spinoff allows Liberty shareholders to avoid paying capital gains taxes. It’s brilliant.

Reverse Morris Trust – For Sirius Shareholders

The good news is that this does not change anything for Sirius’s stock. In fact, a RMT has the potential to help existing Sirius XM shareholders because of its nature to reduce the existing float. On the other hand, it can end up hurting Sirius shareholders if Liberty Media shareholders decide to sell their new Sirius XM holdings upon receiving them via the spinoff.  I hope that made sense.

Let me try it again; in other words, the market can become flooded with new spun-off SIRI shares if Liberty shareholders opt instead for the cash. Then again, this will present another opportunity for investors to double-down on SIRI shares if they so choose. As I've said recently, these shares would then go on sale.

With concerns surrounding royalty rates a thing of the past, Sirius now has a blueprint towards sustained profit growth. And even if the stock were to suffer a temporary setback, it would be just that – temporary. With the company posting record subscriber gains each quarter along with potential rate increases in the future, Sirius will then become a wonderful company at a fair price – as Buffett noted.

Bottom Line

As all of this unfolds, there is still plenty of value in the stock at current levels. If Liberty is to be believed, investors have 60 days from now to get Sirius’s stock on the cheap. It’s not farfetched to project shares might reach $3.50 by the company’s Q4 announcement, which is 30 days from now. Liberty needs less than 1% to reach its goals. In the stock market, this makes Sirius as sure as “sure things” can get.


rsaintvilus 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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