(SiriusXM story updated to reflect additional analyst comments and earnings estimates)
NEW YORK (
) -- Three years after catching the market bottom with a 40% stake in
(SIRI - Get Report)
(LMCA - Get Report)
chairman John Malone would likely concede that the easy money has been made on the satellite radio giant.
Investors who've watched SiriusXM gain roughly 1,500% since a March 2009 bottom would be wise to have the same perspective, as speculation of a Liberty Media buyout has driven Sirius shares to a near 30% gain in 2012. In fact, long-term SiriusXM investors may benefit more from keeping an eye on auto sales as a source of subscriber growth while tuning out what could be an uncertain and complicated prospective buyout by Liberty Media.
In March 2009, Liberty Media took a 40% stake in SiriusXM after providing the company with $530 million in bankruptcy-averting financing. The "bailout" paved the way for a Sirius share recovery from 14 cents a share to $2.35. A standstill agreement that prevented Liberty Media from increasing its SiriusXM stake expired after three years, and on March 20, a petition to the
Federal Communications Commission
paved the way for Liberty Media to build a controlling stake in the satellite radio company.
Deal speculation centers on whether Liberty Media will look to buy SiriusXM through a merger and tax-free spinoff transaction called a Reverse Morris Trust, or through a direct acquisition to take advantage of billions of net operating losses [NOLs]. However, the petition and a subsequent request by SiriusXM to block the prospective stake increase revived speculation of a takeover by the highly acquisitive Liberty Media, and portrayed two companies at odds over the M&A end game.
In February, anticipating the end to Liberty Media's lockup, Citigroup analyst Jason Bazinet made the argument that M&A could drive SiriusXM's stock in 2012, justifying a "buy" rating and $2.50 price target. However, Bazinet's expectations for a deal have changed slightly as a result of Liberty Media and SiriusXM's recent FCC petitions. Now a merger and tax-free spinoff seems remote because of the hostile relationship between the two companies and, instead, Bazinet sees Liberty Media bidding for a controlling stake.
"[The] lack of Sirius cooperation suggests Sirius management is doing its best to ensure its shareholders receive a control premium from Liberty," adds Bazinet in a Monday note.
Analysts covering Liberty Media highlight a SiriusXM stake increase as a likely pre-cursor to a takeout. "We continue to believe Liberty inevitably increases its stake in SIRI above 50% prior to an inevitable merger," wrote Jeffrey Wlodarczak of Pivotal Research in a February note, citing $9 billion that the company can use for share buybacks or acquisitions like Sirius and LiveNation.
"In the valuation of SiriusXM's stock what is priced in is a full majority stake by Liberty Media," says Martin Pyykkonen, an analyst with Wedge Partners, adding this makes SiriusXM shares a risky proposition at current prices, especially since Liberty Media isn't compelled to cut a deal anytime soon. Nevertheless, he expects SiriusXM's earnings and a lack of direct competitive threats from
to eventually justify current share prices.
After SiriusXM lost a record $5.3 billion in 2008, the company turned to a small profit in 2010, which grew to $427 million in 2011. The company is expected to see its profit grow to $543 million in 2012 on a near 25% jump in revenue to $3.4 billion, according to consensus analyst estimates polled by