"[The] lack of Sirius cooperation suggests Sirius management is doing its best to ensure its shareholders receive a control premium from Liberty," added Bazinet in a follow up note. After announcing a planned spinoff of its Starz cable channel and a boost in its ownership of SiriusXM stock to 46%, the prospect of buying shares toward a controlling stake may be warranted. Liberty would also have the ability to repurchase billions in dilutive shares that came with its 2009 bailout.
"We see Liberty's purchase of another 2% of SiriusXM, taking its stake to 48%, as raising the probability that it ultimately takes control, appoints a new board, and pushes through a big share repurchase," writes Lazard Capital Markets analyst Barton Crockett, in an Aug 16 note to clients. "We see the potential of a big repurchase as positive for both Sirius and Liberty, prompting a $0.15 hike in our Sirius price target to $3.00," he adds.
Liberty Media bought 90 million shares of SiriuxSM from Aug. 10 to Aug. 14 at a price of $2.48 and a forward contract for the right to buy 220 million additional shares for $2.05 by October 11, paving the way for the company to have a controlling stake by the fall. That could immediately lead to $7 billion in share repurchases, Crockett of Lazard adds.
"We view reaching a resolution with Liberty as a key future positive development for the stock as it will remove an overhang that has made many investors reluctant to own SIRI," noted Bryan Kraft in a report assessing SiriusXM's earnings earlier in August.
Overall, the company has 3.83 billion shares, meaning that its Thursday afternoon share price of $2.58 still gives SiriusXM a near-$10 billion market cap.
SiriusXM's second quarter earnings were highlighted by a 170,000 year-over-year increase in subscriber additions on the heels of a 16% rise in new vehicle sales, in addition to used car service reactivations and lower churn, according to Kraft. The company's conversion rate held at 45%.
Prior to SiriusXM's share slump in June and July, David Joyce of Miller Tabak and Martin Pyykkonen of Wedge Partners highlighted conversion rates and used car subscriptions as
for SiriusXM's earnings, even in the absence of M&A.
Pyykkonen said in an April interview that the used car market may double the company's satellite services in the next three-to-five years. With SiriusXM just beginning to leverage used car dealer networks to convert previously installed satellite chips into new subscribers the company may have a strong base of prospective subscribers even if new car sales don't maintain current growth rates, as
show continued U.S. vehicle sales strength.
Meanwhile, analysts also highlight SiriusXM's growing cash flow. In 2011, SiriusXM turned
after burning cash throughout the financial crisis and just recently raised monthly subscription prices for the first time in the company's history.
In the second quarter, cash flow generation trends accelerated. Free cash flow grew over 30% in the quarter to $253 million compared with 2011, adding to year-over-year growth from the first quarter.
For another way to play the Wall Street conviction on the Liberty-Sirius relationship, Crockett of Lazard Capital Markets upped his price target on Liberty Media to $125 on Thursday, citing its expected control of SiriusXM, a less complicated Liberty balance sheet post-Starz spinoff, and stakes in assets ranging from Sirius to LiveNation.
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-- Written by Antoine Gara in New York