The stock price of Sirius XM (NASDAQ: SIRI ) has been on the upswing lately, but it is still down year-to-date. The stock price has had a dramatic pullback ever since its majority shareholder, Liberty Media (NASDAQ: LMCA ) decided not to go-through with the buyout of Sirius XM. What many bearish investors do not seem to grasp is the fact that Liberty Media already has voting control of the company and doesn't need to fully own the satellite radio company.
Majority-owner not wholly owned!
After Liberty Media made its $3.68 bid for Sirius XM, the stock price of Sirius XM jumped to as high as $3.85; this indicated that the market believed that the Sirius XM board would reject the company's offer. Liberty Media at the time was helping Charter Communications to acquire Time Warner Cable, so John Malone's investment vehicle wanted to absorb Sirius XM for its great free cash flow.
However, when Time Warner Cable decided to go with Comcast's offer, the original thesis for buying out Sirius XM fell through for Liberty Media. The market itself signaled that there was a very high probability that the board of Sirius XM would reject or negotiate for a higher price. Liberty Media decided to ditch its plan to buy out Sirius XM because it would have had to increase its offer price substantially.
Instead of Liberty increasing its offer to $4 or higher, the company decided that the best course of action would be to allow Sirius XM to continue its robust subscriber and free cash flow growth, and to resume its share repurchase program. Sirius XM also bought back $340 million worth of shares from Liberty Media as part of a previously announced program.
Many investors who are bearish on Sirius XM seem to forget that Liberty Media already controls the company and doesn't need to wholly own it to yield more influence. Liberty owns 53% of the satellite company, and since Sirius XM has more than $1.7 billion of share buybacks yet to be executed, the relative ownership of Liberty Media will go higher if Liberty Media doesn't sell shares of Sirius XM in the market.
Liberty Media's CEO Greg Maffei stated in the company's last earnings call that they already have control, and wouldn't need to "chase the deal" to have more control. And as Sirius XM dramatically reduces its outstanding share count, Liberty Media's ownership will go up to 55%-60% over time. And this is a great way of having more skin in the game without spending more cash in buying a larger stake or by diluting Liberty's share count through a stock offer.
Sirius is moving ahead
Sirius's business is growing nicely with its subscriber base expected to grow to more than 26.5 million by the end of 2014. The company is also trying to address specific customer demographics who have a lower penetration rate. Sirius intends to take on the pre-owned car market as well as Hispanics and female drivers. Sirius XM has 12,500 auto-dealers who are participating in the program to market satellite radios in pre-owned cars, and this will aid in the company's subscriber acquisition efforts.
Sirius XM's conversion rate of turning free or paid trial consumers into self-pay customers was 42% in the last quarter. As the company focuses on more cost-conscious consumers it will probably see that conversion rate dip a little, but it will be growing its total addressable market significantly.
In addition, Sirius XM continues to add a wide variety of content to make sure the company's churn rate stays below 2%. The company recently added golf and religious channels to make its customers happy with an expanding array of varied content.
The company can also market more aggressively to households with two or more cars. Roughly 80% of car-owning households have two or more cars, and the company provides a multi-radio discount which will make the customer more likely to stick with Sirius XM in the long run. Sirius XM should continue to benefit from subscriber and free cash flow growth that will result from these initiatives in the long term.
The bottom line
Sirius XM has robust fundamentals across the board and should do very well in the future; the company's stock price should reflect that. Liberty Media electing to not take the company private had a completely different set of reasons compared to what the market thinks. Over time, Sirius XM's growth in cash flow and share buybacks will lead to healthy increases in its stock price, and Liberty Media will end up owning a larger piece of Sirius XM without doing anything.
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