To C or Not To C… That Is The Question
Over the past few days we have heard a lot about the hypothetical Liberty Media series C shares. Sirius XM investors are trying to wrap their heads around what exactly a C share is, how liquid it will be, and whether owing such shares carries any advantage or disadvantage to the current holding of SIRI shares.
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At this point, Liberty series C shares do not exist. They are proposed as part of an overall strategy of Liberty Media to take full control of SiriusXM.
Liberty C shares would be held by investors in SiriusXM and holders of Liberty A shares and Liberty B shares.
Under the proposal, Holders of Liberty A shares and B shares would be distributed 2 shares of Liberty C. Holders of SiriusXM shares would receive .076 shares of the C series for each SIRI share held. In essense, it would take 13 shares of SiriusXM to get 1 share of C series stock.
Sirius XM investors have some choices to make. You can hold your stock and see what the deal brings to fruition. You can sell your shares and move on. You could sell your shares in SiriusXM and buy LMCA and then await the deal to complete. These are just a few examples.
Let’s look at this from a clean perspective. If you had $10,000 to invest today, and your choices were SIRI and LMCA, what is the better play (assuming the current proposal is the one that goes through)? Assume SiriusXM is at $3.77 and Liberty is at $139.35.
You could buy 2,653 shares of Sirius that would convert to 202 shares of the C series.
You could buy 72 shares of Liberty Media’s LMCA stock that would distribute 144 shares of the C stock, while still holding the A series stock.
In getting into LMCA, you would have 144 shares of non-voting stock and 72 shares of voting stock. I getting into SiriusXM, you would have 202 shares of non-voting stock.
Currently Liberty holds 52% of SiriusXM and the minority holds 48%. After the transaction, SiriusXM shareholders would hold 48% of the C series stock and have about 39% of the overall Liberty Market Cap.
In theory, the price of LMCA would go down in this transaction. To what degree that happens is the burning question. Speculation is that the Series C stock would trade at about $48 to $50 per share. There is little speculation about what price Liberty will trade at, but we may not really need to know that in order to make a prudent investment decision.
If we assume that the C shares trade at $50, then the SIRI buy strategy would garner an investor $10,100. In contrast, the C shares using the Liberty buy strategy would be $7,200. That investor would still have 72 A shares though. If those A shares traded at about $40 after the transaction, we have a wash. It is said that SiriusXM makes up about 70% of Liberty’s market cap. If that is the case, then we can begin to look at this with some numbers. Thirty percent of the current LMCA price is $41.80 under current holdings (half of SiriusXM). Thus, in pure theory the 72 shares of LMCA bought under the strategy of investing in the Liberty side would generate a boost of about $1.75 per share, or $126 in “premium” over the Buy SIRI strategy (now consider the added value to LMCA for the acquired 48% of SIRI stock).
If an investor wanted to take it a step further, you could in theory, sell the C shares right away and buy A shares. The Sirius strategy gives you 202 C shares. Selling those at 50 and buying A shares would give you a total of 242 shares of A. If you went the Liberty route, you wind up selling 144 shares of C and buy an additional 172 shares of A. Add the 72 you already have and you have a stake of 244 shares. What we need to now consider is that acquiring the balance of SIRI would add $11 billion in valuation to the overall entity. Liberty would be a company with a $27 billion valuation with SiriusXM making up about $23 billion. The thing that is hard to wrap our heads around is whether or not the discount the SiriusXM stake currently has in Liberty will be recovered, and to what level. Currently, investing in SiriusXM through Liberty garners you access to shares at a discount. Whether that discount still exists as a wholly owned subsidiary is the question.
Essentially, as the deal is currently structured and with current prices, there is a small advantage to the Liberty trade. There are many moving parts here, and a lot that still needs to happen. Personally, I have half of my stake in Liberty, and half in SiriusXM. For me, I will see half of the benefit of the premium whichever way it goes, and half of the discount whichever way it goes. Stay Tuned!
did i read this correct. are u saying that the liberty A shares will trade in the 50s as well after the transaction? They should continue to trade at the 139ish area ( all things being equal) right? The two shares of the C shares should be valued at 48 each ( again all things being equal)
right?
w.
I read what I wrote, and I can see where the confusion came in. I adjusted the wording to better outline my thoughts. Thank you for the comment. It should read more clearly now.
The bottom line is that you can invest in SIRI at a substantial discount now. Liberty acquiring SIRI will have a cost, and that will be reflected in the Liberty price.
The point I was trying to illustrate is that if that discount evaporates after the deal, the premium that an investor can have with the Liberty route can be substantial.
ok so its possible then that after the trasaction the value of teh class A is adjusted down to the 50’s and the 2 class C shares are meant to make up the difference? sorry if i am being dumb here but for some reason i am utterly confused hahah
The Thousands of Long term Sirius XM Radio investors are not necessarily fans of greedy Liberty media, if this deal goes through I expect huge volume selling. The fact that Liberty can not get enough of Sirius XM tells me that the future of this company is great and the potential to evolve and expand is imminent, we hope that Liberty does not succeed in hassling investors out of greater gains.
Would it also be correct to assume that there might be some volatility (up or down) to Liberty A and/or Liberty C shares if, after Liberty acquires SIRI, Liberty then uses the SIRI stake to finance a greater (or complete) Comcast or Time Warner stake?
With that in mind, isn’t it possible that Liberty would right away go after Comcast and/or Time Warner?
Hello Spencer,
Very interesting article. There is one question, among others, that seems to be a challenge for me to comprehend.
“Speculation is that the Series C stock would trade at about $48 to $50 per share.” This is my feeling as well.
It is my understanding, and you confirm this, that liberty A and B shareholders, and I assume that there are no others, will get 2 C shares for 1 A/B share. Today lmca price is about $140. In this case liberty shareholders will be short changed because two C shares will be $40 less than one A/B share. Am I missing something?
Also, what is going to happen with liberty’s 52% of siri. Are they exchanbging that as well, or 2 for 1 exchange is it.
At the end of the day, the most importamt matters to me would be the price of the new C shares, their quantity, and whether or not the worth of my siri turned c shares is at least the same as before the merger, or desirbaly more:)
Spencer…
Okay, the first question I’m sure for many will be, “where have I been?” That is a long explanation… I thankfully left the media business a few years ago and am doing something way way way different now, LOL. Let’s just say I took a new job in a new direction a little over a year ago that leaves me very little social media time. It is very much for the better for myself and my family… but at the end of the day, I’m still in Sirius.
After Liberty took over Sirius and Yahoo changed it’s website – I became very involved in my new direction, which afforded me very little time and patience to be involved – but again, I still hold Sirius and watch with at least one eye what Liberty is up to.
This leads me to why I’m here… obviously Liberty is up to shenanigans here, IMHO. Looking over the deal last week, my cursory opinion was that we weren’t getting much of a premium for ALL that they can get out of 100% ownership of Sirius (I’m referring to not only the assets and the cash generation, but also the NOL’s). To me, Sirius is worth much more for a potential suitor. While I agree with you that Sirius is richly valued in many ways — there is an abundant amount of assets that fly under the radar that Liberty would be getting away with here for a steal. That is why I don’t like this deal.
That said, I first had to wrap my head around the numbers of this deal. I laid out the numbers in excel to fully understand what they’re doing. If this allows me, the below link is a jpeg of my excel workup of the numbers: http://farm4.staticflickr.com/.....bd62_b.jpg
All the numbers add up… and I can see what Liberty is doing. My concern here is what the market will value the Series C (non-voting) shares at. I note that the Series A Shares closed at $145.33 and the Series B shares closed at $145.35 on 1/3/2014. Liberty is claiming it believes it will have a $27 billion market cap at the close of this deal… but what will be the distribution between the value of the Series A,B and C shares? Will the market see no difference between each series? Thus the A and B shares are also around $48/share, along with the C shares? Or will the market say that the A/B shares are worth more because they have voting rights — which will make the C shares worth less? I note that the 1/3 closing price of Liberty was $16.6 billion — adding in the 1/3 Sirius closing price of $10.3 billion is where Liberty is coming up with the $27 billion total value. What if the market values the voting shares at $75/share – thereby putting the value of the C shares closer to only $40/share? Sirius shareholders get hosed here. An exaggeration? I don’t know. Just wondering if the market will value each of the series of shares the same… a potential risk here where Sirius shareholders could lose value, IMHO.
On the flip side… Liberty is assuming that (due to the dilution of their stock that is taking place)… their stock price for all Series’ of stock will drop from $145 to $48. I know I saw some questions about this fact in this thread… the best explanation I can make to those is this, assuming all Series’ are equal; and based on 1/3/2014 closing prices and outstanding shares as listed in the Prospectus:
If you hold 100 shares of LMCA at $145.35… it is valued at $14,535 – prior to the deal. This will become 100 shares of LMCA at $48.07… valued at $4,807 – after the deal. Plus (2:1 distribution A/B for C) 200 shares of LMCC at $48.07… valued at $9,614. Total ownership would be $14,421. Which is down $114 from before the deal. This is the discount that Spencer is referring to. You are losing this amount in order to acquire the benefits of owning all of Sirius.
Meanwhile Sirius shareholders get 0.076 shares of Series C for each share of Sirius. If you hold 1,000 of Sirius valued at $3.57/share… a total value of $3,570. It will become 76 shares of Liberty at $48.07/share… a total value of $3,653.32. This $83.32 is the premium you would receive from Liberty. Is it enough? Again, this also assumes the market values the Series C shares equal to A/B.
Regardless, I do not feel that 3% premium is enough for ALL that Liberty gets in the deal (much more intangible assets here that are not factored, IMHO). In fact, the Sirius market cap of $10.3 billion combining with the Liberty market cap of $16.6 billion… Liberty is claiming a combined market cap of $27 billion? Sirius already makes up 70% of the Liberty market cap… which after this deal will become 80% of Liberty. The current Liberty holders will still hold 61% of the combined company. I believe that Liberty holders must give up more. I can only hope that the “Committee” can get it closer to $4/share that Spencer is talking about here… because again, Liberty is getting MORE than the tangible assets here. Liberty is gaining the intangibles… aka, the NOL’s, the leverage at Sirius and more.
IMHO, if the premium does not increase, I will be voting no on any offer from Liberty… which has to be approved by a majority of the 2.88 billion non-Liberty held shares still outstanding, I will note.
That is all for now… thanks Spencer.
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perfect thanks!
Homer….
Great to hear from you.
Thanks . Shoot me an email…we should catch up
so can sirius go under with all this confusion… will SIRI shareholders spook and pull out completely. I’m wondering if keeping my SIRI shares is too much of a risk. what do you think?
Nancy…
Sirius XM will not go under. It is a very strong company.
What I keep coming back to, in your “clean perspective” example, is the potential tax implications. In the context of the “clean perspective,” would I be starting with some amount less than $10,000 (the amount given) if I have to sell my SIRI shares in order pursue one of the other options that you discuss in your article? I am most interested in anyone’s feedback regarding my comment.
Daniel…
There are tax implications to consider. What I would do is contact your tax professional. Everyone is different.
If you are in a long term gain situation, you would get taxed on the sale. I depending on your situation, you may want to wait for the tax free stock swap.
I am sure liberty is considering that shareholders may do that and have to wait.
Perhaps I can write something about it in general terms
After this takeover what entities will LMCA consist of? Will SIRI still be in LMCA/B? Will LMCC be Barnes and Noble, Braves, ETC as well as SIRI? What is the difference among the 3 stocks?
Thanks