Sirius XM: A Higher Bid From Liberty Media?

Satellite radio giant Sirius XM (NASDAQ: SIRI  ) has been on a great run lately. The company's subscriber base and revenue are growing at rapid paces, but its stock price hasn't followed. Its controlling shareholder, Liberty Media (NASDAQ: LMCA  ) is intent on gobbling up this growing asset at a notable discount to its intrinsic value. However, the market sees the bid by Liberty Media as a lowball offer, and Sirius shareholders can expect a higher bid from Liberty.

Sirius XM has stellar metrics
Sirius had a fantastic 2013, with its cumulative subscriber base surging past 25.5 million. The company beat its own guidance of 1.6 million new subscriber additions, adding 1.66 million subs in 2013. The number of self-pay subscribers on Sirius' roster grew to more than 21 million.

The strong economic recovery and the rebound of the capital markets have been boons for Sirius' business. With higher automotive sales, newer subscribers should pile in. The company's management has pegged its 2014 subscriber estimate at 1.2 million net additions. Sirius increased the price of its core offering by $0.50 to $14.99 a month earlier this month, and this should lead to growth in average revenue per user, or ARPU, as well. However, the modest price increase might prompt Sirius' monthly churn rate to rise from 1.8%. 

The company's receivers are pre-installed in 70% of all new cars in the U.S., and this will enable it to bring in more subscribers through free trials. Sirius' CEO stated that the company's satellite receivers are already installed in 57 million cars in the U.S., and he hopes to double this number in the next five years. In addition, Sirius is focused on adding more subscribers in the used-car market and offering differentiated content to attract newer customer segments, like the Hispanic population.   

Sirius does face heightened competition from Pandora  (NYSE: P  ) . In December, Pandora's monthly user base surged to 76.2 million users and total listening hours jumped to 1.58 billion hours. With Pandora available on 9 out of the top 10 best-selling passenger cars, Sirius does face incremental competition here.

Pandora recently introduced advertising for its car audience, and it will start monetizing this growing group of users via its partnerships with automakers like Ford. Paying users of Pandora will continue to have an ad-free experience. Relative to Pandora, Sirius offers a wider breadth of content and a commercial-free experience to consumers, so both companies can coexist due to different value propositions for the consumer.

Bid shortchanges minority shareholders
Liberty is already a controlling shareholder of Sirius, with roughly 52% ownership. Liberty put forth a preliminary offer to acquire the remaining portion from minority shareholders at an exchange ratio of 0.0760 per Liberty Class C stock, which translates into $3.68 per share. However, this bid from Liberty for Sirius is an attempt to acquire an undervalued asset. 

Sirius' growth potential is immense, and the company's profitability and free cash flow generation have been on the upswing. Sell-side analysts are bullish on the company, with their one-year average price target for Sirius stock pegged at more than $4.50 according to Yahoo!. Sirius' management expects to bring in more than 1.25 million subscribers in 2014 and projects that the company will have top-line revenue of $4 billion. 

With such stellar metrics across the board and a steadily growing business, Sirius is in an enviable position. The market believes that Liberty has to raise the bid, with shares of Sirius trading above the $3.68 mark. Also, Sirius shareholders will receive non-voting Class C shares in Liberty Media, which will put the stockholders at a notable disadvantage as well. Liberty should raise its all-stock bid for Sirius to close to $4 a share.

The takeaway
Sirius is a greatly undervalued company and it is growing at a healthy clip. It offers a commercial-free radio service, distinct from terrestrial radio and other Internet services like Pandora. The company's addressable market is on the rise as more of its receivers are installed in preowned cars. Sirius has immense upside and its shares have been trading above $4 recently. Almost certainly, Liberty will have to raise its bid to take this undervalued company private. 

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Read/Post Comments (8) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2014, at 1:23 PM, NoWayGM wrote:

    I want to keep my Sirius stock . I don't want the Malone money or the crappy non-voting shares.

  • Report this Comment On January 16, 2014, at 1:56 PM, edwardstewart wrote:

    Liberty media offer is a first offer and likely low, but does any for a minute believe Malones offer is completely without justification? Malone's has a major team working for him crunching numbers. $3.68 is likely on lower end of the scale but not something to go "Nader" over.

    Months from now when the deal goes down if siri is trading around where it is now - what do we expect Malone for pay? Will we we say "last year it was higher so there is our justification", Will siri holders say that with a straight face?

  • Report this Comment On January 16, 2014, at 2:41 PM, j18a21g wrote:

    Edward,

    If you feel $3.68 is a fair price for SiriusXM why don't you just sell now. If we could get all the weak hands out of this stock it would be much harder to manipulate.

  • Report this Comment On January 16, 2014, at 2:55 PM, dannysboy wrote:

    A good share of LMCA's 140+ share price is because it owns Sirius stock. Malone wants to use an inflated LMCA stock as currency to buy the rest of siri shares at a low ball price.

    No thank you!

    siri has no more satellite expense for 5-6 years.

    It is a low labor cost company with around 1500 employees.

    A new price increase.

    As far as competitors, it really has none. Pandora, Spotify, et al are music store boutiques. SiriusXM is a general store of everything broadcast----both by satellite and the internet.

    The fleet of vehicles on the road are still at least 10 years old. Car sales are not going to slow down until the number declines to about 7.5 years.

    I have a six figure number of shares that will be voting no until the price is right!

  • Report this Comment On January 17, 2014, at 9:35 AM, sirifair6 wrote:

    I agree with the author and dannysboy's thoughtful comments. Liberty media's 70%+ worth is sirius xm. Sirius xm xm is fanally on a roll after so meany years of struggle, and now Malone wants it for a song!!! I will vote with my feet.

  • Report this Comment On January 17, 2014, at 3:12 PM, realguise wrote:

    Ditto Dannysboy! I'm a guy from a lower middle-class world with a blue collar job who essentially gambled on SIRI. During the years following 9-11, my lifetime investments were in shambles. I couldn't seem to recover. I had lost Enron, Worldcom, and Calpine to bankruptcies. I had no savings or liquidity, so I sold all my remaining stocks at great losses and purchased six figures of SIRI stock. On paper, I'm currently just over the break-even point but the SIRI potential was my ONE and ONLY shot at significantly changing my life and financial future. The rate of return and the quicker timeline matters greatly! My "speedboat" to a sustainable good life will be reduced to "cruise ship" vacation. Yeah, my "sob story" but Malone has enough. It's sickening that all of my "would-be" profits will be redistributed.

  • Report this Comment On January 17, 2014, at 7:00 PM, dannysboy wrote:

    realguise, there are many just like you who have owned this stock for many years and we keep getting mugged.

    If that worthless FCC Chairman Martin had approved the merger shortly after the DOJ approved it, instead of 6 months later, we would never be in this position. It's the second time in my investment life I have been screwed by government regulators. The other time was when political incompetents decided to deregulate the utility industry and ended up bankrupting many companies.

    I, like you, got my clock cleaned in in 2000 and '01.

    I have worked my way back but, like you, I need for siri to be allowed to succeed.

  • Report this Comment On January 21, 2014, at 3:17 AM, ara1029 wrote:

    Edward, please go ahead and sell your shares now since you feel that way, as it becomes a "NO vote" for the rest of us. I'm totally with you realguise, and kudos to dannyboy for your comments as well. This is absolutely sickening. Smart money needs to come in and start driving the price higher, forcing Liberty's hand. Hey maybe even Apple or Google can start a bidding war against LIberty? I wouldn't mind that at this point, but the reality is, there is little reason as to why SIRI can't be a double digit stock in and of itself within 2 years! This "deal" is highway robbery.

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