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) -- The battle between

Sirius XM

(SIRI) - Get Sirius XM Holdings, Inc. Report


Liberty Media


continues to heat up, and shorting the satellite radio firm might be the best way to play this trade.

Sirius, which competes with





, and terrestrial radio, has been locked in a battle with Liberty Media. John Malone's entertainment company owns nearly half of the radio firm, and wants to take eventual control.

Any eventual takeover or merger may go the way of a Reverse Morris Trust (RMT), says Barclays Capital analyst James Ratcliffe, who wrote a research report discussing the benefits of the pair trade. He rates Liberty Media shares "neutral," but lowered his price target to $98 from $104, reflecting lower public asset values.

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A Reverse Morris Trust involves Liberty spinning out its stake in Sirius, having done so already with




Discovery Communications

(DISCA) - Get Discovery, Inc. Class A Report

, which would flood the market with Sirius shares. "We believe the most likely outcome is for Liberty to split off its stake in SIRI (along with the company's Sirius XM debt and a five-year trade or business, likely TruePosition or the Atlanta Braves baseball team) and merge that stake with SIRI, in a Reverse Morris Trust (RMT). This transaction would allow Liberty to, in effect, distribute the Sirius XM shares to Liberty shareholders in a tax-free manner," Ratcliffe wrote in his note.

Before a RMT takes place, however, there are two things that would have to happen, the major one being Liberty buying more shares of Sirius. Liberty owns almost 46.2% of Sirius shares and would need to own more than 50% to make this plan happen. With Sirius being free-cash-flow positive now, there has been talk of

Sirius doing a buyback

, but that would help Liberty's position, and Sirius CEO Mel Karmazin is not inclined to do that. Ratcliffe estimates that it would take anywhere between $210 million and $340 million purchases of Sirius stock in the open market to get 50% of the company, while also contributing the additional assets to get the RMT approval from various government agencies.

In its recent

first-quarter earnings

Sirius mentioned various ways of returning cash to shareholders, but there is no definite plan just yet. In early 2012, Sirius instituted the

first price hike

in the company's history.

Although Karmazin has said that he wants a premium for Sirius if Liberty really wants the company, Malone and Liberty Media are unlikely to pay one, with Ratcliffe calling it "highly unlikely." In fact, they received a 6%-7% premium in the DIRECTV deal in 2009, Ratcliffe said.

The biggest risk to going long Liberty and short Sirius is the timing of a deal. Liberty could eventually control Sirius even if it does not own 50% of the company, by converting the preferred shares it received when it bailed out Sirius in 2009 into common shares. Liberty Media loaned Sirius $530 million in 2009 when the company was near bankruptcy.

If a deal does not get done by the end of this year, Liberty may decide to take a long-term approach, which could see the short Sirius/long Liberty trade go the other way for investors. If Liberty decides to keep more cash in the company as part of the deal with Sirius, shares of Sirius could run away from Liberty, "raising the absolute level of the 50% of vote and value threshold necessary to complete the RMT split/merge, thereby requiring more, not less, cash to be contributed," Ratcliffe noted.

Shares of Sirius are up 1.3% in early Tuesday trading to $1.96.

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Written by Chris Ciaccia in New York

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