As most know, Liberty SiriusXM Group (LSXMA/Okay) is the Malone-style monitoring inventory for Liberty Media’s majority possession curiosity in SiriusXM (SIRI). Liberty famously bailed out SIRI following the monetary disaster and made a killing on the funding (a lot of it early of their holding interval). Almost fifteen years later — skipping over a whole lot of fascinating historical past — in December, Liberty Media reached an settlement to formally split-off their stake and merge it again with SIRI, making a simplified one-class share construction on the satellite tv for pc radio supplier.
As virtually all monitoring shares do, LSXM has traded at a major low cost to underlying shares it’s meant to trace, this transaction is supposed to break down that low cost, nevertheless, even a month after the transaction was introduced (and with a comparatively fast, “early Q3” shut) a big low cost stays. The alternate ratio set forth within the merger settlement is estimated to be 8.4 (may transfer round ever so barely) shares of SIRI will likely be issued to every share of LSXM. Utilizing the present share costs, the unfold is roughly 44.1%.
Mentioned one other method, one might successfully purchase SIRI for $3.62/share through LSXM at this time. Why may this discrepancy exist? The first argument I’ve seen is SIRI shares are overvalued as SiriusXM has pursued a typical Malone-style levered fairness mannequin and repurchased a major quantity of SIRI inventory, which has artificially elevated the worth of SIRI and decreased liquidity (and elevated the share owned by Liberty Media). Which may play a small half in it (however SIRI is not at present out there and presumably arbs are shorting SIRI in opposition to LSXM), however I imagine the bigger motive for the unfold continues to be the hated monitoring inventory construction, many buyers do not perceive it or just cannot personal it (will not discover LSXM in lots of index funds).
LSXM from a elementary perspective, you may create SIRI for a reasonably low-cost valuation that ought to present some draw back safety submit merger completion if certainly SIRI is the overvalued aspect of the commerce.
As all the time, please be happy to level out the place I is likely to be incorrect. I am utilizing 2024 estimates from Tikr as administration hasn’t offered steerage but. It must be famous that SiriusXM is in the midst of giant multi-year capex spend on revamping their satellites and free money circulate ought to soar significantly beginning in 2025. Put up-close, SIRI ought to grow to be eligible for extra index inclusion, together with the S&P 500 the place it’s at present excluded as a managed firm. Just like JXN or others, that would present assist for the shares and add a flip or two to the a number of.
There may be some enterprise threat right here, SiriusXM could have appreciable debt at 3.9x EBITDA and a comparatively flat progress profile. SiriusXM does plan to prioritize deleveraging following the shut of the transaction to get again to their 3-3.5x goal leverage ratio, earlier than totally turning again on the buyback machine. Whereas their churn is remarkably low (surprisingly, even throughout Covid, subscribers did not cancel regardless of commutes dropping), their subscriber base is growing older and so they proceed to face competitors from Apple, Spotify and others. They’re reinvesting within the enterprise to push again on competitors, launching a brand new tech stack, together with a streaming solely model, however I view these efforts as largely defensive. Both method, it is a surprisingly resilient enterprise and must be pretty steady within the close to to medium time period.
Disclosure: I personal shares of LSXMK
