Liberty SiriusXM, arbitrage or not?


Shortly, SiriusXM is the leading audio entertainment company in North America, a combination of subscription service SiriusXM, ad-supported music streaming service Pandora, expansive podcast network and a suite of business and advertising solutions. SiriusXM generates high level of free cash flow from its recurring revenue. As of December 31, 2023, SiriusXM Holdings had a total of 34 million subscribers and 150 million listeners.

This business competes for the time and attention of listeners with other content providers such as Apple Music, Spotify, YouTube, traditional FM/AM radios and various other systems and services. Based on insideradio’s article from 2022 SiriusXM receivers were installed in 84% of new cars and 54% of used cars and has grown to be the largest audio entertainment company in North America. The ownership structure of the company is quite complex and therefore potentially undervalued, unseen by the markets.

Interesting things have happened around the company, which have potentially created a profitable investment opportunity and aroused great interest among respected value investors like Seth Klarman, Warren Buffett and maybe Todd Combs. The stock has plummeted over 42% since the beginning of the year 2024, valuing the company in single digits.

Arbitrage or not?

The complex owner structure is because Liberty Media owns 83% of SiriusXM Holdings and Liberty has further sliced it up to A (LSXMA), B (LSXMB) and C (LSXMK), all combined are presented as LSXM and these are called the tracking stocks of SiriusXM. In December 2023 Liberty Media announced that SiriusXM and all the tracking stocks will be combined to create shareholder value by eliminating the complex structure. They Also announced that the special committee of the board had reached this agreement, making in highly certain. The transaction is expected to be completed early in the third quarter of 2024.

(Liberty Media, December 12, 2023)
In the transaction details the combination process of shares can be misleading. It is told that ‘’ holders of each series of LSXM common stock will receive a number of shares of SplitCo stock equal to the Exchange Ratio, calculated as described below, such that LSXM stockholders receive 1 share of New SiriusXM for each share of SiriusXM previously held at LSXM, adjusted for LSXM net liabilities.’’, and existing SiriusXM holders will receive 1:1 shares of the new combined stock. LSXM holds approximately 1.7 billion in net liabilities including transaction fees, expenses etc., and in December 2023 the adjusted exchange ratio was expected to be around 8.4, which could change at the day of transaction because of possible changes for example in change of shares outstanding etc. To keep it simple, we are going to use the ratio of 8.4. After the exchange, former LSXM holders are expected to own 81% of the combined stock, down from 83%. The next step is where it gets even more confusing:

Based on my calculations, if we adjust LSXM (A, B and C combined) ownership from 83% with reverse percentage method to represent 100% of ownership, we notice that the 83% of tracking shares value the original holding company much lower than it is. The gap was even bigger in 2023, but what has happened is that SiriusXM itself is negative 42% YTD vs the tracking stocks negative 15% YTD.

Now if we use the expected (possible change to come before the combination) exchange ratio of 8.4 and expect that the combined stock continues to trade with its current price and valuation, it will mean that with todays price of 3,18 per share the spread is down to 1,85. The LSXM trade is definitely going to have some amount of dilutive effect, unless there is something I don’t see here. The exchange ratio should be around 9.75 to continue to trade around 24% valuation spread, and maybe that is something to follow before the day of the combination.

Based on dataroma, we can see that for example Seth Klarman’s fund has been buying Liberty SiriusXM tracking stock since early 2020 from higher prices so it was never an arbitrage only for them. There was also a lot of Liberty/Sirius related activity in Berkshire filings in the last few years, but in the latest media noise, it is misleading that the activity is based on this arbitrage opportunity, but it’s not because there is not much arbitrage, all the latest buying from these value investors, what I think, was all about its historically cheap valuation. So, let’s dive into the financials and valuation.
(Barron’s, April 14, 2024)

In the books of SiriusXM

After the merger of XM and Sirius, it has never been so low valued company as it is today. Revenue has been steadily growing along with price increases, installations, expansions, and new subscriptions. The business is a cannibal, shares outstanding down from 5788 to 3858, and a stable growth earnings. It is a highly levered company with liabilities-to-assets ratio of 1.2 supported with interest coverage ratio of 4x and it has been like that for the past 10 years along with its growth. As you can see from the table below, everything with the company has been highly stable and the management have been very shareholder friendly and intends to be so in the coming years. Just looking at the valuation ratios, after plummeting this year, the business would make almost around a doble just from re-rating to its historical valuation.

So why did the company plummet -40% this year alone and is it justified? There could be various reasons. One is that the gap between Sirius and the tracking stock was narrowing down, but basically in the wrong direction vs historical valuation point.  The latest annual report also presented the first year of flat revenue YoY and new concerns about increased competition in a form of streaming services arose among common investors (Spotify, Apple Music, YouTube etc.). Expectations for revenue growth are now around 1-4% going forward and demands from investors for the company to set some initiatives to grow its topline. Also, in the earnings call the management provided some information about roughly level subscriber numbers and modestly softer ARPU from a more diverse subscriber base. Based on their comments also the ad market remains uncertain.

After considering the probable short-term situation, big players including Berkshire, Baupost and the management itself they seem to remain highly confident. SiriusXM has managed to maintain very low subscriber churn at 1.6%, they are still building the next generation experience, which is driving for growth, they are also putting a lot of efforts to appeal to the younger audiences and refreshing overall brand. There are also further ad business growth efforts along with optimizing cost structure (in the latest report they surpassed their EBITDA and FCF targets). In 2023 they also extended SiriusXM integration agreements with Mercedes-Benz, Honda, Volvo and launched new partnerships with EV manufacturers.


SiriusXM is one of a kind in the audio entertainment market, highly different from Spotify algorithm based streaming platform and from many more, and I don’t think that this kind of competition for listeners is going to kill SiriusXM. The business is still highly profitable, shareholder friendly, and customers intentions to switch are low after getting used to one provider, supported by the fact that subscriber churn was at 1.6%. Based on my observations, there is a lot of organizational efforts going on to further improve activities and the halving of the valuation is not really justified, but at least there is now a great margin of safety. You could also get additional small spread from LSXMK tracking stock.

(Gurufocus, April 17, 2024)


This report is for informational purposes only and should not be construed as investment advice. All expressions of opinion are subject to change without notice and the author has no obligation to update the information contained in the report. The presentation may contain information derived from third-party sources and the author believes that the sources from which information is derived are reliable. However, such information is presented as it is, without warranty of any kind. The reader should note that this information is not investment advice and does not constitute a recommendation to purchase and sell any specific security. As such, the reader should consult with his/her own advisers to determine the analysis.

 The author reserves the right to change its views or investment positions at any time, for any reason. The author has no obligation to notify the market about selling or buying the shares of the company discussed in the presentation.

This report contains certain forward-looking statements and projections. These kinds of projections are included for illustrative purposes only. By nature, forward-looking statements involve unknown risks, uncertainties, and other factors. No assurances can be given that the forward-looking statements in this presentation will be realized. The author does not intend to update these forward-looking statements. Use of this report is at your own risk.

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