* Speculation mounts for potential share buyback, spin-off
* Liberty close to gaining control of Sirius XM, taking over
* Sirius XM shares up nearly 40 percent since start of year
By Liana B. Baker
Aug 24 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
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
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
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.
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.
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
"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.