Liberty Media Is Exploiting SIRI Investors' Delusion

NEW YORK (TheStreet) -- For reasons I can't quite comprehend Sirius XM (SIRI) investors continue with their misguided optimism over recent events with Liberty Media (LMCA). They seem to think Liberty's effort to take full control of Sirius is going to somehow manifest into a win-win situation where both Liberty and investors of Sirius walk away holding hands.

I can't help but think how this is an example of the perverse investor characteristic that likes to make easy things difficult.

Sirius XM investors need to understand that Liberty Media is not working for their best interest, nor should they. Last week, Liberty said it had entered into a forward-purchase contract giving it the right to increase its stake in Sirius XM to 45.2%. The contract allows Liberty to purchase 302 million shares of Sirius XM at a forward price of $2.15 per share or $650 million.

Instead of looking at this news objectively, many were quick to apply lipstick to this disappointment by suggesting that Liberty had somehow established a floor for the stock at a price of $2.15.

Remarkably, this failed logic continued to be asserted as the stock plummeted to $2.07. The obvious question should be, how can a "floor" have been supposedly established 8 points above where the stock was currently trading? Nobody bothered to ask.

Essentially, Liberty is saying it is not willing to pay more than $2.15 for the stock. If that's the case, why should anyone else?

I think the answer to this question will become very apparent in the coming days and weeks. My suspicions tell me one clue will be more insider sales -- specifically from CEO Mel Karmazin, who I'm expecting to sell more of his 49 million options at some point this week.

Interestingly, as the table shows above, on the same day that information surfaced regarding Liberty's contract for 302 million shares, the company bought 16 million shares of Sirius on the open market at a price of $2.13 -- while the very next day, it added over 44 million more at a price of $2.12. So not only is the company systematically increasing its position for control of the company, but it is shrewd enough to do so without disrupting the market.

Disappointingly for investors, this tactful strategy also dampens hopes for an early retirement.

Hope still remains that once Liberty takes over, Sirius' stock will then start appreciating higher thereby bringing prosperity for all interested. But evidence suggests that Liberty's chairman, John Malone cares very little about Sirius as a stock.

Investors are too quick to forget that Liberty has already made more than its share of profits off of this investment during the course of the past three years. The fact is, not only has it gotten its money back ($530 million loaned to Sirius) but it was also awarded 40% of the company in the process. So to think that it cares about the stock going up at this point is beyond ridiculous as it has already gotten the cake. The rest (as they say) is just icing. And it understands that the icing does not have any current value beyond $2.50.

Instead Liberty and Malone have shown they care more about the assets and controlling rights of Sirius -- including $8 in billion net operating losses or tax shelters against future profits. Remarkably, the current value of the NOLs matches that of Sirius' current market cap. So if you want more evidence of questionable value for a stock, I don't think there can be a better argument against a purchase.

As far as Liberty is concerned, they still win if Sirius does not go up another penny and they will see to it that they acquire full controlling interest without giving current shareholders one more cent than they deserve. And I think that's the way it should be since, after all, they were the ones that took the majority of the risk by bailing Sirius out with $530 million to avoid bankruptcy.

Bottom Line

Investors of Sirius need to start embracing the reality that hope is not a sound investment premise -- and hope is all Sirius ever had. The smart thing to do here would be to sell the stock, shelter yourself from more disappointment and move on with your life. This stock is not reaching $3.00 absent some sort of a miracle.

For that matter, the market has been telling investors all along that there was a cap on this stock and its upside potential was limited. Now it is saying that the stock is in a downtrend -- and both times, Liberty is the only one to come out a winner.

At the time of publication, the author had no positions in any of the stocks mentioned.

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