As most know, Liberty SiriusXM Group (LSXMA/K) is the Malone-style tracking stock for Liberty Media's majority ownership interest in SiriusXM (SIRI). Liberty famously bailed out SIRI following the financial crisis and made a killing on the investment (much of it early in their holding period). Nearly fifteen years later -- skipping over a lot of interesting history -- in December, Liberty Media reached an agreement to formally split-off their stake and merge it back with SIRI, creating a simplified one-class share structure at the satellite radio provider.
As almost all tracking stocks do, LSXM has traded at a significant discount to underlying shares it is meant to track, this transaction is meant to collapse that discount, however, even a month after the transaction was announced (and with a relatively quick, "early Q3" close) a large discount remains. The exchange ratio set forth in the merger agreement is estimated to be 8.4 (might move around ever so slightly) shares of SIRI will be issued to each share of LSXM. Using the current share prices, the spread is approximately 44.1%.
Looking at LSXM from a fundamental perspective, you can create SIRI for a fairly cheap valuation that should provide some downside protection post merger completion if indeed SIRI is the overvalued side of the trade.
As always, please feel free to point out where I might be incorrect. I'm using 2024 estimates from Tikr as management hasn't provided guidance yet. It should be noted that SiriusXM is in the middle of large multi-year capex spend on revamping their satellites and free cash flow should jump considerably starting in 2025. Post-close, SIRI should become eligible for more index inclusion, including the S&P 500 where it is currently excluded as a controlled company. Similar to JXN or others, that could provide support for the shares and add a turn or two to the multiple.
There is some business risk here, SiriusXM will have considerable debt at 3.9x EBITDA and a relatively flat growth profile. SiriusXM does plan to prioritize deleveraging following the close of the transaction to get back to their 3-3.5x target leverage ratio, before fully turning back on the buyback machine. While their churn is remarkably low (surprisingly, even during Covid, subscribers didn't cancel despite commutes dropping), their subscriber base is aging and they continue to face competition from Apple, Spotify and others. They are reinvesting in the business to push back on competition, launching a new tech stack, including a streaming only version, but I view these efforts as mostly defensive. Either way, this is a surprisingly resilient business and should be fairly stable in the near to medium term.
Disclosure: I own shares of LSXMK
Good synopsis.
ReplyDeleteBorrow on SIRI is pretty high but why not hedge this and just collect? Or at least partially so. It seems pretty likely that the transaction will close and the valuation will settle in closer to the figures you've outlined as opposed to where SIRI trades.
I'm curious, why do you think the spread exists if you expect it to collapse more to the LSXM side?
DeleteI'm honestly trying to figure it out. Not like SIRI has a tiny float, they're not buying back stock ahead of the transaction so you don't have that "artificial" bid. It's not a large index component either. People are shorting it to capture the spread. Who is buying it? I don't keep up with Reddit message boards, but isn't the meme stock craze mostly done? Just don't understand who is buying SIRI and not LSXM unless they're unable to buy LSXM because it is a tracking stock.
Is the exchange ratio going to be 8.4 for sure? They said it is calculated with a SIRI price of 4.23, could they update the exchange ratio with the current 5.2 price? If so, the discount would be just around 15%...
ReplyDeleteThe SIRI share price only impacts the share adjustment amount to account for the LSXM net liabilities, I believe that ratio is fixed, but if its not, it actually improves the spread because it would require less SIRI shares to cover the net liabilities LSXM is bringing to the transaction, moving the ratio up to 8.7 shares for each LSXM.
DeleteKey risks are:
ReplyDelete- is the deal going through actually? think many investors tired of Liberty constructs (and management?)
- siri's short interest is very high and probably keeping up the share px to some degree, question to what extent
- finally, how are you hedging the long LSX?
I don't think there's much, if any, risk to the deal not going through with the B-shares having super voting rights. Only LSXM shareholders need to approve, they've been waiting a long time for this deal, it's going to be approved.
DeleteWhy would the high short interest keep up SIRI shares? Who is buying the shares from the shorts? I would think the short interest would go up into the transaction, not down, doesn't seem like a short squeeze is likely here. But I'm probably missing something, I don't normally play in high short interest stocks.
I'm currently not hedging the long LSXM, might change that stance, but currently unhedged.
not the vote, but rather from a regulatory perspective. think some investors on the sidelines as the deal closing has been rumoured for ages.
Deletewhere would siri share px be w/o the current short interest? likely lower.
I think you need to revisit your view on the SIRI fundamental value. This is a levered business with secular headwinds undergoing a business model transition. There are real terminal value questions. Look at where cable/broadband trades and does this deserve a premium or a discount to that?
ReplyDeleteI think a useful excercise would be to pretend that SIRI is not listed. All you know is that LSXMA represents an investment in SirusXM and you know the new share counts and capital structure. What is that business worth? I don’t think many investors believe it is higher than the current look through price. But maybe that’s where you see the opportunity.
That's fair pushback. Once the Malone fans and event guys exit, what's the fundamental value of SIRI. I agree there's terminal risk here and they're adding leverage to the terminal risk via this transaction. Thanks, appreciate the comment.
DeleteForget about event guys and Malone fans. The deal will close on day zero. What price is new SIRI trading at on day 1 ? Do you think more or less than 3.50 or whatever spot look through is? If you are not confident that it is materially higher than LSXMA / 8.40 then I’m not sure this is so great. I think the current SIRI price is creating a situation where you want to believe there is a discount. But that stock represents a tiny amount of the pro forma float. True price discovery is likely more accurate via LSXMA which is more liquid . And zeroing in on target valuation is always very difficult on these low multiple stocks with high leverage as a percent of EV, especially one without a real comp. A turn of EBITDA makes a big difference. Again, if current SIRI stock price didn’t exist would you still want to be involved?Anyway, my 2 cents.
Deleteseems like a great idea esp if it exists closer to Q3 because SIRI borrow, thanks MDC
ReplyDeleteThanks for the thoughtful summary. I already own LSXM. Do you think I should short SIRI? Would appreciate your thoughts on this.
ReplyDeleteI'm not short it, but plenty of others are short.
DeleteAfter close, I assume most arbs will try to cover their Siri short. Wouldn't stock likely climb in that case? Just looking at the float of LSXMK and seems like 40% is owned by Malone, Berkshire and a couple of other long term investors I am familiar with like FPR. Just trying to think about how this trades in terms of flows after close. No idea how Siri trades next 6 months though.
ReplyDeleteSIRI shorts will have new SIRI shares from the LSXM conversion to offset their shorts, shouldn't really need to cover.
DeleteThank you for this idea. It has a very nice IRR as you pointed out. I don't think SIRI will fall enough to make this a bad trade. Even if the IRR is cut in half due to the new shares falling, the IRR is very attractive.
ReplyDeleteBerkshire keeps loading up on these. I wonder if they are using options or anything to hedge given short interest is so high on Siri.
ReplyDeleteFWIW - I sold 5.5 calls as a partial hedge and a little more downside protection. At a ratio of 8:1 instead of the 8.4:1. I still don't really understand how the ratio could change by closing. Always a risk of a short squeeze, so be careful doing this and don't get into a margin situation. One could always sell calls and buy a higher call to protect against a short squeeze.
DeleteCould you just buy call spreads on LSXM with like August expiration or something? Not sure what would happen at conversion
Delete@josh What resources did you use to learn how to trade options? I am a new learner looking for books, videos, courses....
Deletehttps://www.amazon.com/Option-Volatility-Pricing-Strategies-Techniques-dp-0071818774/dp/0071818774/ref=dp_ob_title_bk
DeleteSheldon Natenburg book is considered the 'bible'. I am not sure if it is the right book for someone new though. I've actually been wanting to re-read it again for insights as its been a few years.
Perhaps someone else on this thread can suggest an options book for someone new?
Funny enough just saw the (classic!) Natenberg book is included as a free audiobook if you have an Audible subscription, it's almost the worst book I can think of to do in an audiobook format ha. Fabozzi, Hull and Natenberg are what I think of as the starter books for derivatives. If you are likely to know less about the instrument you are trading than the market maker you probably should steer clear until that changes - look for the one foot hurdles instead.
DeleteThank you both.
DeleteI will disagree here. Yes, you shouldn't have 0 knowledge but you can have medium knowledge and pursue a strategy that is different from the market maker. A market maker might try to gain a 10c edge on an option and do that 100s of times per day, then hedge so they are delta or gamma neutral. (10c on 100 contracts is 1000 per day, not bad!)
DeleteSomeone who wants to be long with options or option spreads can take this 10c hit and setup a strategy that can mitigate downside risk while capturing some upside.
LXSMA options only go out to July currently. Not much open interest, could buy 30 / 35 and pay approx 1.90 or about 0.90 in premium. 35 is the highest strike available, I think I would prefer buying something like 35 / 40 for a higher risk but higher reward.
ReplyDeleteAt close would the options reflect the change? Feels like maybe easy play is to just buy lsxm. Or wait until August options are out. Too worried to sell Siri calls and buying puts limits upside a ton.
DeleteYes, the options would be adjusted. For example, WPC spun off NLOP recently, the OCC (clearinghouse) adjusts the deliverables. See this memo for example - https://infomemo.theocc.com/infomemos?number=53768
ReplyDeleteUnderstood that makes sense. Yeah wish options existed past July. But right now just playing the long lsxm startegy. SI on Siri is 40%. Gonna stay away from hedging using traditional means for now.
ReplyDeleteIf the deal closes, could selling pressure from those trying to take a profit drive the share price down back towards the price of the pre-merger discount that the tracker stocks had to Sirius?
ReplyDeleteDefinitively a risk according to me. But the way I think about it is I can probably exit my whole position in the first 10 minutes after market opens after the transaction closes. I just don't have that much capital. Meanwhile, like 40%+ of the float is owned by berkshire, baupost, malone and vanguard. Just think being smaller/nimble allows for a better ability to deal with the risk. I don't know for sure. But seems like Heads I win, tails i dont lose much scenario?
ReplyDeleteAlso I know some of the other investors on the list like FPR and Sculptor. They are not selling.
DeleteAny idea why Berkshire increased their SIRI position so greatly last quarter? 9.7 million to 40 million shares is a real size leap. Some specific transaction between BRK and Liberty to facilitate a tax free merger?
ReplyDeleteNo idea. both Siri and LSXMK have been a bit weak recently. Hoping Siri stays above the $4.50 mark by the time it closes haha
ReplyDeleteI’m not understanding
ReplyDeleteAny help would be appreciated
If I own 1000 Siri shares and do nothing post merger what will they be worth
I’m wondering the same thing. I own 2000 shares of SIRI. Will I still own 2,000 shares after the merger, what will the stock price be? Should I sell before or hold through the merger?
ReplyDeleteYou'll still hold 2000 shares of SIRI. I don't really have a strong view of what the share price will be or whether you should sell or hold. But I think owning LSXMA/K is superior to owning SIRI pre-merger.
Delete2000 of Siri at $4.43 is $8860. If I turned around and bought LSXMK at 29.50, I would have 300 shares. I read the merger was 8.4 shares of the new SiriusXM for every one share of LSXMK. So about 2500 shares, which seems like a better deal. Am I doing the math correct? Could the 8.4 shares change?
ReplyDeleteThat's correct. The 8.4 might move ever so slightly, but not enough to change the math much. Keep in mind, many in the market assume the price of SIRI will drop post merger, eliminating much/all of the spread. But if you want to own SIRI long term, likely best to own LSXMK (assuming you don't have to pay taxes on SIRI).
DeleteOwning LSXMK has been a painful trade so far. Monitoring this really close to see where it goes over next few months.
ReplyDeleteBerkshire buying this hand over first recently is interesting. Seems like more than an arb. After nearly a decade of event investors talking about this trade - all of them having been burned - it seems to be finally happening. With a clean structure, does this make an acquisition more palatable? Terminal value headwinds are known - that's not a differentiated view. Moreover, the question is are there financial or strategic buyers of this asset <8x EBITDA. While there's greater digital competition, at the end of the day Sirius remains a monopoly on satellite radio, with churn that's proven resilient. It's not often one can buy a monopoly for <8x EBITDA. And yes there is some leverage, but it's manageable and will come down quickly. Not saying this will happen, but it's in the Berkshire wheelhouse, especially with Berkshire sitting on $167bn in cash earning 5%. LSXM look thru today (<$29) yields 11%.
ReplyDeleteHard to believe Berkshire would want to make this a fully owned subsidiary. For starters, it doesn't even begin to move the needle at Berkshire's scale. Second, it's a dying industry losing more and more customers every year. Doesn't seem very Berkshire like to own this garbage.
DeleteGood points. Yet they were willing to buy 12% of PARA at $30 for 12x EBITDA before selling it at $12. This is a much better business than PARA.
DeleteThey've had a number of those small losing trades in their public portfolio. The fully owned businesses on the other hand have been mostly winners and cash gushers. You might be confusing arb like plays from long term holdings.
DeleteThe ‘it’s garbage / not growing’ take is lazy, and not one size fits all. Oil and gas companies aren't the epitome of a growth industry. That hasn’t stopped them from building several big o&g stakes. Not productive to view everything through a singular lens. My main point is this is a cash generative monopoly trading on an 12% FCF yield. That doesn’t happen often. Don’t overlook that.
DeleteI think its somewhere in between. Ted/Todd is interested in the arb, but given BRK's size, they won't be able to sell shortly after the conversion, so they must see something valuation wise in the medium term.
DeleteHi, I am new here and looking into this deal. Siri price dropped a lot and look through currently at 2,92. That makes a FCF yield of 13,1%. This deal is now more interesting then it has been earlier, isn't it? And then 2025 FCF should even increase, right?
ReplyDelete