Sirius shares on a tear, but Liberty Media takeover looms large

Fri Aug 24, 2012 7:00am EDT

* Speculation mounts for potential share buyback, spin-off

* Liberty close to gaining control of Sirius XM, taking over board

* Sirius XM shares up nearly 40 percent since start of year

By Liana B. Baker

Aug 24 (Reuters) - Investors are buying up Sirius XM Radio stock ahead of a potential share buyback, but some analysts and investors say it would be wiser to hold off on purchasing shares until there is clarity on how Liberty Media plans to operate the satellite radio company.

Liberty Media filed a petition with the U.S. Federal Communications Commission last Friday to take control of Sirius XM.

Liberty, led by billionaire Chairman John Malone, acquired an initial stake of about 40 percent in Sirius in 2009 as part of a deal in which it loaned the satellite radio provider $530 million to help it stave off bankruptcy. It has been acquiring more shares in the open market in recent months and has said plans to boost its stake above 50 percent and gain full control of the company.

Analysts and investors widely expect Liberty to make Sirius XM undertake a large share buyback once its own board is installed. On Liberty's earnings call earlier this month, Chief Executive Greg Maffei called Sirius XM "under leveraged" and said there was "plenty of opportunity for share repurchase."

After Maffei's comments, Barclays analyst James Ratcliffe estimated in a research note that Sirius XM could buy back $1.1 billion to $2.9 billion in shares by 2013.

Sirius XM shares have risen about 9 percent, to roughly $2.50 per share, since Liberty's comments about a buyback on Aug. 8. At least six analysts predict shares will climb to $3 or higher, according to Thomson-Reuters StarMine, which provides analytics and equity research. Shares are up nearly 40 percent since the start of the year.

But one wealth manager said investors buying shares ahead of a presumed buyback could end up losing money if they held them too long. The buyback may already be factored into the stock's price, said Jeff Sica, chief investment officer of Sica wealth management, which holds more than $1 billion in assets.

"Investors anticipating that Liberty will just sweep in and unlock the value of the company and generate share appreciation are a little bit premature," said Sica, who does not own Sirius XM shares.

Once Liberty gains control, it will have final say over Sirius XM's decisions and so will need to lay out a strategy for the satellite radio company.

"Liberty probably might be more aggressive in addressing changing technology," said Moody's analyst Carl Salas, who added that Liberty might make Sirius XM invest more in advancing its satellite technology.

Liberty Chairman Malone in July criticized Sirius XM Chief Executive Mel Karmazin in comments made to the Wall Street Journal for not expanding more internationally or pursuing better technology. Sirius XM currently has about 22 million U.S. subscribers.

Karmazin's employment contract is also up for renewal, and there is no guarantee he would stay after a takeover. He told analysts that he and the board would figure out his role before Sirius XM's third-quarter conference call in the fall.

SPIN-OFF CONCERNS

Liberty Media previously said it was considering a tax-free spin-off of its stake in Sirius XM in a transaction known as a Reverse Morris Trust. Liberty has used that transaction structure before, most recently when it spun off DirecTV in 2009. In that deal, Liberty gave its own shareholders a small premium over what it gave to DirecTV shareholders, according to Canaccord Genuity analyst Tom Eagan. If Liberty engineers a similar deal with Sirius XM, the satellite radio company's investors could be at a disadvantage.

"To me, the big question is, when these two companies combine, what distribution will each stockholder get? Who will get more than one share of the new company per one share that they already have?" Eagan said.

Karmazin has been adamant about obtaining a premium for Sirius XM's shareholders in any deal with Liberty. For his part, Malone told Reuters in July that any deal premium should go to him as the controlling shareholder.

In addition to uncertainty over which shareholder constituency will get a deal premium, Moody's analyst Salas added, there are still questions about what entity Liberty would combine with Sirius if it uses a Reverse Morris Trust. Such a combination usually involves the merger of a bigger entity with a smaller one. Liberty's wide-ranging portfolio includes stakes in everything from Barnes & Noble to baseball's Atlanta Braves to Live Nation Entertainment.

Some investors feel that even with a potential buyback or spin-off, Sirius's valuation is simply too high at current levels. The stock is trading at a multiple of 11 times its forward earnings before interest, taxes, depreciation and amortization. In comparison, DirecTV trades at 6.5 times forward earnings, according to StarMine.

Gabelli analyst Brett Harris said investors are bidding up Sirius XM stock ahead of a share buyback, but once that's over, he said, the stock will be fully valued with little room to grow. He has a "hold" rating on stock, which is held by the firm.

"All the things analysts are talking about right now, like the share buyback and Liberty purchasing more shares, don't change the underlying economics of the business," Harris said.

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