Why Sirius XM Shareholders Are Getting Hosed in the Buyout

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Sirius XM Radio Inc. (NASDAQ: SIRI) is now in-play under mergers and acquisitions. The virtual parent Liberty Media Corp. (NASDAQ: LMCA), under John Malone, has offered to buyout Sirius XM shareholders in a tax-free buyout at about $3.68 per share. The terms call for 0.0760 shares of a new issue of Liberty Series C common stock per share of Sirius XM. Pay attention here, because it sure seems as though Sirius XM shareholders may be getting hosed here in a serious way.

Liberty already owns about 52% of Sirius, and the move will give Sirius XM’s public stockholders about 39% of the future Liberty Media. The problem in this buyout is that Sirius XM is already considered a controlled entity under Liberty. The shareholders simply may not be able to stop this acquisition. The value of $3.68 is also dependent upon the share price of Liberty. Analysts have a consensus price target of $4.60 for Sirius XM, some 25% higher than  Liberty’s buyout offer price.

Sirius will be assembling a special committee of its board to consider the offer, which fortunately requires a vote from the minority stockholders. How objective will this special committee really be? Liberty’s shareholders will also have to approve the transaction. Liberty shareholders should easily vote yes, but the incentive for Sirius XM holders to vote yes is something which 24/7 Wall St. sees as mysterious or even ludicrous.

If Liberty is able to swallow Sirius, it gives Liberty access to the satellite radio leader’s full free cash flow of about $625 million. That will almost certainly be used in Liberty’s pursuit of Time Warner Cable Inc. (NYSE: TWC). Liberty holds about a 27% stake in Charter Communications Inc. (NASDAQ: CHTR) and has been trying to put together the financing to buy out the much larger Time Warner.

Meanwhile, Time Warner, which is the second largest cable provider in the U.S., is still reportedly trying to put together a deal with the nation’s largest cable provider, Comcast Corp. (NASDAQ: CMCSA). This may shut Liberty out, or it could be a deal that includes Charter in some markets.

Again, how does this help Sirius XM holders? The benefits of the deal to Sirius shareholders are based upon promises of better days ahead. Even if it is a tax-free deal that still implies upside ahead, Sirius XM is already worth more on its own according to the analysts who follow the stock. That upside is also based upon investors maintaining a positive view on Liberty.

Liberty Media’s CEO is Greg Maffei and he said, “Our proposal will allow Sirius public shareholders to convert from a non-controlling stake in a subsidiary into a direct equity position in Liberty, the parent company… We believe the combined company will have better access to capital and all of Liberty’s shareholders — both its current shareholders and the Sirius shareholders who become Liberty shareholders as a result of the proposed transaction — will enjoy enhanced liquidity as shareholders of a $27 billion market capitalization company.”

In some ways this deal seems a bit like Gordon Gecko’s offer to acquire Bluestar Airlines in the movie Wall Street. Maybe Sirius won’t be broken up and sold off, but the premium paid sure seems like a paltry offer for what the real value is. Evercore Partners recently raised Sirius XM’s rating to Outperform and raised the price target to $4.50 versus a prior $3.90 per share. The value here is that the telematics business is the next growth catalyst, and that business could grow by 400% to 500% over the coming decade.

24/7 Wall St. recently pointed out that the endless rallying in Sirius XM shares may be coming to an end. We also pointed out that our own longstanding bullish outlook was  one which we were becoming more muted on based upon risk and reward. What we will say now is that this buyout adds potential downside in case Liberty leverages up too much on its cable ambitions. It also seems to bring no added upside above and beyond what is already there. The stock has also traded in a 52-week range of $2.95 to $4.18, so the stock has already been worth more to investors recently than what Liberty is offering to pay now.

Sadly, with Liberty owning the controlling stake in Sirius XM it makes an outside bidder’s ability to come with a better deal almost impossible unless John Malone and Greg Maffei determine that it is just too good of an offer to pass up. Sirius XM shareholders may get seriously hosed here.