We all saw the news that SiriusXM would be buying back $2 billion in stock. The first thing to understand is that a share buyback does not have to happen. There have been many times where a company announces a buy back and then scraps the plan at a subsequent date. That being said, I do not think that this is the case for SiriusXM. Not only do I feel that a buyback is in the cards, but I also feel that it will ultimately be bigger than the $2 billion already announced. It will simply take time (think years) for all of this to happen.
Regardless of Liberty Media there was always a point in time that SiriusXM would need to figure out something to do with its cash. The options were share buybacks, dividends, acquisitions, and expansion. It does not have to be just one of these and in fact it can be some sort of combination of all of them. That is one reason it is important to understand that the current buyback plans can change.
With Liberty Media in the picture there is a wrench of sorts to consider. What we know is that Liberty Media has stated that it wants to get back some $1.7 billion that it invested into shares of common stock. Another statement by Liberty, in reference to a spin or Reverse Morris Trust, was that it did not want to spin high basis shares. These distinctions are important and I recently covered them in an article published on Seeking Alpha.
Getting Back $1.7 Billion
I see this as goal number one for Liberty Media. The company would love to make money on its shares, but the oversimplified goal is to get back the $1.7 billion in costs without giving up any control. The mechanism by which this is likely to happen is through share buybacks. If you consider that Liberty Media owns half of SiriusXM, then half of any money used to buy back shares would go to Liberty Media. Let's look at the already announced $2 billion in buybacks. Liberty will get back $1 billion of its desired goal to recoup their $1.7 billion. This would leave Liberty Media needing another $700 million to break even. That would require another $1.4 billion worth of buybacks that would need to be announced.
This is where it gets interesting Now we need to consider the High Basis shares (shares purchased by Liberty on the open market and through forward purchase contracts).
Not Spinning High Basis Shares
Liberty Media holds about 706 million high basis shares. As stated, the first step is to recover the money invested by Liberty in obtaining these shares. That is the baseline. Think about this for a moment. The higher the stock price is, the fewer high basis shares Liberty needs to sell in order to recover its money. Liberty is perfectly willing to be patient in the high basis share goal as long as the growth at SiriusXM can support holding the shares and waiting for additional buybacks. If Liberty sees another opportunity that it considers more promising than waiting for SiriusXM to grow, this dynamic could change. Investors need to consider this.
Now let's assume that the initial $2 billion dollar share buyback happens all at once and at a price of $3.25. The $2 billion would remove 615,384,616 shares from the outstanding share count. Of that number 307,692,308 would be Liberty Media High basis stock. Liberty media would still hold 398,307,692 shares. Liberty would still need another $700 million to meet its recovery goal above. Now let's assume that SiriusXM announces a second share buyback worth $1.4 billion and that buyback happens at a price of $4.00 per share. That event would remove 350,000,000 shares of which 175,000,000 would be Liberty Media high basis shares. At this point Liberty will have recouped its $1.7 billion, but would still hold 132,692,308 high basis shares.
There is now a decision point for Liberty Media. The year is likely 2015 at this point and Liberty will need to decide if the growth at SiriusXM warrants holding on and waiting for more share buybacks, if there is a better place to invest its money, or if putting the remaining high basis shares into a spin is a better idea. As you can imagine there are a lot of moving parts and things to consider. For all we know the audio entertainment sector could be vastly different by then.
Let's assume for the time being that Liberty wants to hold. Remember, the goal now is to not spin high basis stock and Liberty still has 132 million shares of it. A third buyback could accomplish the desired goal. If the stock was at $5 per share it would mean that a share buy back would need to be large enough to wipe out 265,384,616 shares. The cost of the third buyback would need to be $1.326 billion.
In all the three share buy backs would cost $4.727 billion and take 1,230,769,232 shares out of the picture. At that point Liberty will have recovered its money from high basis stock buys and make a profit of $663,461,540 (39%). Essentially this would be the point in time where Liberty could do a spin or Reverse Morris Trust.
How Does This Happen?
This will all happen through use of cash and debt. Liberty Media has expressed in the past that they felt SiriusXM was under levered. This means that Liberty felt that the company was capable of taking on more debt. Currently, if we consider the $1.25 billion credit facility, the debt picture for SiriusXM is about $3.7 billion. The magic number for a debt ration seems to be $4 dollars of debt for every $1 of EBITDA (a 4 to 1 ratio). SiriusXM has guided that it will have EBITDA of $1.1 billion in 2013. That would imply that the debt could be at $4.4 billion.
If we use current cash of $700 million, assign $900 million to 2013, $1.1 billion to 2014, and $1.3 billion to 2015 we would have $4 billion to work with in cash over the next 3 years. Let's assume that the company wants to keep $500 million on hand. This leaves $3.5 billion. This would imply that at some point the company will need to borrow another $1.25 billion. That would put the theoretical debt somewhere in the neighborhood of $5 billion. Now we need to remember the 4 to 1 ratio. EBITDA needs to be at $1.25 billion. In my opinion SiriusXM can get there with relative ease over the next 3 years. In fact, EBITDA of $1.6 billion should be in the cards on a conservative basis. Thus, over the next three years and through various share buybacks SiriusXM should be in a great position and the interests of Liberty in line with the interests of shareholders. There is even room for paying down some debt in that picture!
The key now is getting these share buybacks rolling, and maintaining growth of at least 20% on EBITDA.