Late last week, Liberty Media (FWONA) announced its interest to take full control of Sirius XM (SIRI 1.29%)-- a not-so-surprising move. Liberty is already the controlling shareholder of Sirius, but now seeks full managerial control over the satellite radio operator. The deal to purchase the remaining shares values Sirius at $3.68 per share. More importantly, it's tax free as each Sirius share will be converted into a fraction of a Series C Liberty Media share. So far this week, investors in Sirius look to be supportive of the move, while Liberty Media's shareholders aren't so sure. Here's what you need to know and where to put your money.
Financial engineering
Liberty Media Chairman John Malone knows exactly how to build long-term value in his company. His acquisitions have not only been immediately accretive to the company but structured impeccably. Sirius XM is the pinnacle of this method, so far.
Instead of an all-cash transaction, which would take on a hefty tax charge, the Sirius acquisition will be done in shares. Sirius shareholders will receive 0.076 shares of Series C Liberty shares, while existing Series A and B Liberty shareholders will receive two shares of the new Series C stock. It's a beautiful, tax-free transaction that would leave existing Sirius shareholders a 39% stake in the new $27 billion Liberty Media.
Who wins?
The deal is Liberty's latest effort to consolidate the media business. Along with its quarter stake in Charter Communications (and Charter's courtship of Time Warner Cable), Liberty's control of Sirius is part of Malone's master plan in the cable TV business. The result would be incredible operating efficiencies, pricing power, and lots (and lots) of cash.
Sirius shareholders get a slight premium (though now erased, in Monday's trading) in the buyout, but are awarded a more important asset than cash -- Liberty stock. The stock is free exposure to the future of cable -- an idea tied very closely to Liberty Media.
Overall, though, this is a bargaining chip for Malone. By bringing Sirius fully in under the wing of Liberty Media, Malone and Liberty are well armed in their quest for cable TV dominance. Liberty can more easily raise money with the cash-printing Sirius XM feeding directly into the coffers. At least, that's what John Malone has used as his reasoning for acquiring the rest of the company.
As has been the case for some time now, investors betting on the long term should focus on Liberty Media. This company is aggressively moving to shape the future of its industry—more so than any other. The Sirius acquisition is not a game changer in itself, but instead another piece of the puzzle. For Liberty and Sirius shareholders, view this as another win.
