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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.
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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